This Year, One in Five Companies Will Become Marginal Enterprises

3,475 Marginal Companies Last Year... 7.4% Increase Compared to Previous Year
Average 'Expected Default Probability' of Marginal Companies 4.1%

With the resurgence of COVID-19, government quarantine measures have been strengthened, and citizens' consumption activities have even contracted, intensifying the suffering of self-employed business owners. On the 31st, the streets of Myeongdong, Jung-gu, Seoul, where restaurants and various shops are concentrated, appeared quiet. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporters Eunbyeol Kim and Sehee Jang] Due to the impact of the novel coronavirus disease (COVID-19) this year, it is projected that more than one in five companies will become 'zombie firms' that cannot even pay interest with the profits earned over three years. This estimate takes into account the worsening financial soundness of companies due to the COVID-19 shock.

According to the 'Financial Stability Status' submitted by the Bank of Korea to the National Assembly on the 24th, considering the sales shock caused by COVID-19, the proportion of zombie firms this year is expected to rise to 21.4%, an increase of 6.6 percentage points compared to last year. This estimate assumes a severe stress scenario among the COVID-19 sales shock scenarios. It assumes an average sales decline of 10.5% across industries and an average 29.5% decrease in COVID-19 vulnerable sectors.

Under this scenario, loans to zombie firms are expected to rise to 22.9% (175.6 trillion KRW) of total loans to externally audited companies.

The expected default probability of zombie firms this year was evaluated at an average of 4.1% as of June, indicating a significant increase in credit risk. This figure is approximately 2.4 times higher than the expected default probability of non-zombie firms (1.7%).

Meanwhile, the Bank of Korea reported that as of the end of last year, there were a total of 3,475 zombie firms, accounting for 14.8% of the 23,494 externally audited companies. This represents an increase of 239 firms (7.4%) compared to 2018 (3,236 firms, 14.2%), marking the highest level since the Bank of Korea began compiling related statistics in 2010. Zombie firms had already reached a record high before the outbreak of COVID-19.

Although 838 companies exited the zombie firm status last year, up from 768 in 2018, the number of companies newly entering zombie firm status increased more rapidly from 892 to 1,077 during the same period.

As of the end of last year, the debt held by zombie firms reached 115.5 trillion KRW, an increase of 10.3 trillion KRW over one year. While debt has increased, the ability to repay it is steadily declining. As of the end of the first quarter this year, the interest coverage ratio sharply dropped to 3.1 times compared to 4.7 times in the first quarter of last year. The debt-to-equity ratio rose from 78.5% at the end of last year to 82.2% as corporate loans increased.

This content was produced with the assistance of AI translation services.