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| Legoland Korea in Chuncheon, Gangwon Province / Yonhap |
Large businesses, state-run firms struggle to raise capital
By Park Jae-hyuk
A default in project financing for the construction of the Legoland Korea amusement park in Gangwon Province has not only caused concerns over the possibility of a series of bankruptcies of securities firms and builders, but has also made it more difficult for big businesses to raise money, according to industry officials, Tuesday.
Even before the Gangwon provincial government triggered distrust in the nation's bond market by breaching its promise to guarantee the repayment of the amusement park developer's debts, affiliates of the SK, Lotte and Hyosung groups raised money through primary collateralized bond obligations (P-CBOs) guaranteed by the state-run Korea Credit Guarantee Fund (KODIT).
P-CBO has been used mainly by small- and medium-sized enterprises (SMEs) with lower credit ratings. As a result, the issuance of P-CBOs by major business conglomerates has been interpreted widely as proof that they are facing setbacks in raising capital.
Last week, large proportions of corporate bonds issued by LG Uplus and Hanwha Solutions remained unsold, despite the two companies' high credit ratings. Corporate bonds issued by state-owned companies, such as Korea Electric Power Corp., Korea Hydro & Nuclear Power Corp., Korea Expressway Corp. and Korea Gas Corp., also failed to attract institutional investors.
Amid the liquidity crunch, Lotte E&C borrowed 500 billion won ($348 million) from its affiliate, Lotte Chemical, and sold 200 billion won in newly issued shares to the chemical firm, causing concerns over a potential deterioration in the financial stability of the nation's fifth-largest business group.
The builder claimed that the loan was a preemptive measure for its stable financial structure, but KOSPI-listed Lotte Chemical's stock price plunged after the deals, as investors regarded the contracts as proof that Lotte E&C is on the verge of bankruptcy. In order to reassure its investors, Lotte Chemical announced on Tuesday that its management purchased treasury stocks collectively worth 440 million won.
Some local news outlets even reported that Samsung Electronics sought to borrow money from the Korea Development Bank, although both the conglomerate and the state-run lender denied the news report.
"Conglomerates are unlikely to go bankrupt, but they will face difficulties in fundraising at least in the short run," Hana Securities analyst Kim Sang-man said. "The market conditions will weigh further on small and mid-sized businesses that have already been burdened with significant debt since the beginning of the COVID-19 pandemic."
The analyst expected the bond market to stabilize in the near future, thanks to the government's decision to inject 50 trillion won worth of liquidity. But he added that external factors, such as geopolitical tensions over China, could worsen the situation.
A Federation of Korean Industries' (FKI) survey of the nation's 600 largest companies in terms of sales showed that their outlook for fundraising was worse than the forecasts for profitability, investments, exports, domestic consumption, employment and inventory, due to rising interest rates and falling stock prices.
"The interest rate hike should be moderate, and the bill to lower corporate taxes should be passed as soon as possible," said the FKI's Choo Kwang-ho, its economic research division head.
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