[Business & Issues] Jeong Yong-jin's Reform Personnel... What Is the 'Interest Coverage Ratio'?

⑬Jung Yong-jin's Decision... Sudden Replacement One Week After Shareholders' Meeting
9,620 Won Interest Paid for Every 1,000 Won Earned
Liquidity Deterioration in Construction Companies Due to Spread of Real Estate PF

[Image source=Yonhap News]

Chung Yong-jin, Chairman of Shinsegae Group, made a bold move by dismissing the CEO of Shinsegae Construction as his first reform personnel decision since taking office. It is an unusual decision to remove a CEO who was reappointed at the shareholders' meeting just a week earlier. The dismissal is interpreted as a result of the liquidity crisis faced by construction companies due to the failure of real estate project financing (PF) businesses, which led to the deterioration of Shinsegae Construction's financial stability.

In particular, the interest coverage ratio, a key indicator of financial stability, has recorded negative figures for two consecutive years, raising concerns that the company could become a distressed firm. With Heo Byung-hoon, the group's financial expert and Executive Vice President of the Management Strategy Office, appointed as the new CEO, attention is focused on how much the company's financial soundness can improve going forward.

CEO Reappointed at Shareholders' Meeting Abruptly Dismissed... Chairman Chung Yong-jin's First Bold Decision

[Image source=Yonhap News]

On the 2nd, Shinsegae Group dismissed Chung Doo-young, CEO of Shinsegae Construction, and appointed Heo Byung-hoon, Executive Vice President of the Management Strategy Office, as the new CEO. The head of sales and the sales manager of Shinsegae Construction were also dismissed. Heo Byung-hoon is set to be officially appointed as CEO at the extraordinary shareholders' meeting scheduled for the 9th of next month.

This personnel change is the first reform move made by Chairman Chung Yong-jin at the group level since his promotion. Although Chung Doo-young's three-year reappointment was decided at the regular shareholders' meeting held on the 26th of last month, it is highly unusual that this decision was overturned just a week later to appoint a new CEO.

The background of this decision is largely attributed to Shinsegae Construction's severe performance slump and liquidity crisis. The company recorded an operating loss of 187.8 billion KRW on a consolidated basis last year, which was identified as the main cause of the parent company E-Mart's first-ever annual operating loss. Additionally, the debt ratio soared to 951.79% last year from 265.01% the previous year, nearly a 700% increase, placing its financial soundness at a critical risk level.

Interest Coverage Ratio Records Negative for Two Consecutive Years... Considered a Distressed Firm if Below 1 for Three Years

In particular, the 'Interest Coverage Ratio,' one of the key criteria for corporate credit rating, has recorded negative values, heightening the sense of crisis. The interest coverage ratio is calculated by dividing operating profit by interest expenses and serves as an indicator of a company's ability to repay debt.

Generally, if this ratio is below 1, it means the company cannot even cover its interest expenses with its earnings. If this situation persists for more than three years, the company is classified as a 'distressed firm' unable to generate profits and is effectively pushed out of the market.

According to financial information provider FnGuide, Shinsegae Construction recorded an interest coverage ratio of -9.62 last year, following -6.73 in 2022, marking two consecutive years of negative figures. This means that for every 1,000 KRW earned, 9,620 KRW is paid out as interest.

The risk from real estate project financing (PF) businesses has become prominent, severely worsening performance, and the interest expenses on funds invested in PF have created a vicious cycle threatening financial soundness. Shinsegae Construction's non-operating interest expenses increased more than tenfold from 1.8 billion KRW in 2022 to 19.5 billion KRW last year.

Amid losses from real estate PF and economic downturn, the number of major domestic conglomerates with interest coverage ratios below 1 is rapidly increasing. According to an analysis of business reports from 265 major conglomerates by the corporate analysis research institute Leaders Index, 74 companies, or 28% of those surveyed, had interest coverage ratios below 1. The number of such companies rose from 26 in 2021 to 55 in 2022, and further to 74 last year, showing a continuing upward trend.

Companies that recorded interest coverage ratios below 1 for two consecutive years, including 2022 and last year, besides Shinsegae Construction, include Taekwang Industrial (-20.2), Hyundai Mipo Dockyard (-12.1), HJ Heavy Industries (-3.6), Hyundai Livart (-2.6), LG Display (-2.5), E-Mart (-0.1), and Lotte Shopping (0.9).

Financial Expert Heo Byung-hoon Appointed as Emergency Measure... Key Task is Resolving Liquidity Crisis

Heo Byung-hoon Appointed as New CEO of Shinsegae Construction

The liquidity crisis at Shinsegae Construction now rests on the shoulders of Heo Byung-hoon, who was urgently appointed as the new savior. Known as a financial expert within the group, Heo joined Samsung Group in 1988, working in the Corporate Restructuring Headquarters' Management Diagnosis Team, Samsung C&T's finance department, and as CFO of the Americas division. He then moved to Hotel Shilla in 2011, serving as Head of Management Support and CFO. In July 2018, he joined Shinsegae Group, holding positions such as Vice President of Planning at the Strategy Office, Vice President of Support, Vice President of Management, Head of Planning and Strategy at the Department Store Division, and Head of Finance at the Strategy Office.

Under the new leadership, Shinsegae Construction plans to accelerate efforts to strengthen financial soundness. The company has focused on securing liquidity exceeding the scheduled funds due in the first half of the year through the absorption merger of Shinsegae Yeongrangho Resort, bond issuance, and the sale of its leisure division.

There is also growing interest in whether the company's downgraded credit rating will recover. Korea Ratings (KR) downgraded Shinsegae Construction's credit rating from 'A' to 'A-' in its regular evaluation last month. KR noted in its report, "We considered factors such as large operating losses due to rising construction costs and losses related to unsold properties, as well as increased contingent liabilities from PF risks." It pointed out, "Sales performance has been sluggish for a prolonged period, especially in the Daegu area where the housing market has significantly deteriorated, leading to difficulties in collecting construction payments and increasing burdens from reduced project profitability and losses."