This chapter was prepared by Kenneth H. Kang.
A report by the LG Economic Research Institute (LGERI), which examined financial data from 164 nonfinancial companies of the top 60 business groups listed on the Korea Stock Exchange, found that profitability and sales continued to improve in the first half of 2000 (“The Validity of Interest Coverage Ratio,” LGERI, October 19, 2000).
Other firm-level analyses have used EBIT (earnings before interest and taxes) which excludes depreciation and therefore usually shows a lower value for earnings (and therefore a lower ICR) than does EBITDA. However, EBITDA which includes depreciation, is regarded as a more accurate measure of a firm’s cash flow position and short-term ability to finance its loan obligations. EBIT is used more often because of the ease in collecting the data and in drawing comparisons with other countries.
The analysis here uses firm level financial data for 496 companies of the top-64 chaebol groups in 1999 (excluding Daewoo) compiled by IFC using data from the Korea Investor Services.
Many of the worst performers represented companies in workout programs or in court receivership. Here, distressed debt of companies with an ICR of below 1 (so called “precautionary” debt) made up roughly 20 percent of the total interest-bearing debt.
“Manufacturing Industries: Analysis of Cash Flow during 1999,” Bank of Korea, August, 2000.
As mentioned earlier, much of this was issued shortly after the crisis in early 1998 with a standard 3-year maturity.
To have a sense of its impact on its leverage ratio, a 10 percent reduction in debt for the top-4 chaebol would have lowered their debt-equity ratios in 1999 from 255 percent to 203 percent (according to their combined financial statements). A 20 percent debt reduction would have lowered their debt-equity ratios to 180 percent.