Growing Corporate Leverage Posing Increasing Risk
BMI View: With elevated levels of household debt already weighing on the Korean economy, leverage within the corporate sector now appears also to be becoming a problem. Debt ratios of an increasing number of chaebols have risen to alarming levels and the recent failure of a number of conglomerates has sparked fear of further meltdowns. To us, a key risk stems from the cross-shareholding strategy that many chaebols employ in order to insulate themselves against market pressures and consequently guard against hostile takeover bids. The intricate relationships expose the balance sheet of healthy companies to a possible deterioration in financial health of numerous other companies to which they are linked.
South Korea appears to be unable to escape its addiction with debt. With elevated levels of household debt already constricting consumption and weighing on the country's economic growth, leverage within the corporate sector appears to progressively be becoming a problem for South Korea.
In late September, five affiliates of the Tongyang Group, a mid-tier chaebol, filed for court receivership after succumbing to years of mounting financial losses. The final blow came when the group failed to secure sufficient funding to repay maturing debts at the end of last month. Earlier in June, STX Pan Ocean, the shipping arm of the STX Group, was forced into receivership after its aggressive debt-fuelled expansion back-fired amid a prolonged downturn in the global shipping industry.
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