A growing number of subsidiaries of large family-owned conglomerates or chaebol that dominate Korea's business landscape are at risk of insolvency, according to a study by the LG Economic Research Institute.
Companies that were once flush with cash are joining the ranks of borderline insolvent firms that are having trouble paying even the interest on their loans from the money they make.
Some 99.1 percent of the total debt of borderline businesses is owed by chaebol subsidiaries, up from 90.4 percent in 2007.
The average debt of a borderline company increased 5.4 fold from W127 billion in 2005 to W679.9 billion this year (US$1=W1,061). In contrast, the amount of loans taken out by financially stable companies rose just 1.9 fold from W239.4 billion to W461 billion over the same period.
In other words, companies at risk of insolvency saw their debt load increase almost three times faster than companies with solid fundamentals.
As more chaebol subsidiaries fail to repay their debts on time, banks' insolvent loans have grown markedly. As of September, insolvent loans from domestic financial institutions stood at W39.8 trillion, up W6.8 trillion compared to the end of 2012.
Lee Han-deuk at the LG Economic Research Institute said, "As insolvencies among major businesses grow, not only are lenders' profitability and financial health deteriorating, but the jitters could spread throughout the money markets."