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Weakening Won Battering Smaller Companies

Posted September. 26, 2008 07:35,   


A financial executive at an electronic parts maker in the Chungcheong region says, “Our company lost some three billion won (2.59 million U.S. dollars) because of damage caused by the currency option product KIKO (knock-in, knock-out) between March and August this year. We need a rollover on a bank loan of eight billion won due at the end of this month, but we’re worried if banks allow us to do so.”

“We used to be a financially stable company that never ran a deficit over the past 15 years.”

Another financial executive of an auto parts company in Busan says, “We import U.S. auto parts and supply them to domestic conglomerates. We signed supply contracts when the won-dollar rate was 950 but since the rate has exceeded 1,100, we are left way in the red.”

Small- and medium-size enterprises, which were hit by high prices for raw materials in the year’s first half, are now struggling from other problems.

Most exporters have suffered huge losses from KIKO, a derivative product aimed at safeguarding against currency fluctuations, while most importers have experienced huge foreign exchange losses due to the weaker won.

Quite a few smaller companies are faced with bankruptcy amid the liquidity shortage.

Kim Ki-moon, chairman of the Korean Federation of Small and Medium Business, told a news conference yesterday, “Sound small-and medium-sized companies that bought KIKO are panicking that they might collapse due to the liquidity crisis.”

One CEO said, “We expect to make it this year, but we dread facing the first half of next year. The situation will enter an extremely dangerous phase when companies experience drops in their credit ratings and banks begin to collect their loans.”

Jeong Seok-hyeon, chairman of the Joint Countermeasure Committee of KIKO Victims, said, “We thought KIKO was good medicine, but it turned out to be a virulent poison that can kill a number of small and mid-size blue-chip companies if we do nothing about it.”

According to the federation, 70 out of 102 smaller companies or 68.6 percent could collapse if the won-dollar rate reaches 1,200. The calculation is based on the debt service coverage ratio, with a figure of one or under meaning a company could face bankruptcy due to negative cash flow.

Reeling from damage inflicted by KIKO and foreign exchange losses, smaller companies have been hit hard again from curtailing loans by domestic banks.

The federation conducted a survey on 154 smaller companies on the impact of the U.S. financial crisis on business management, with 121 corporations or 81.8 percent citing “huge or significant” influence.

On how the crisis will influence them, most respondents cited negative effects on financial capital flow (63.4 percent), lower domestic consumption (62.6 percent), and delay in the recollection of sales money (60.2 percent). The majority 68.8 percent said they have serious financial difficulties.

To stabilize their financial status, the federation urged financial institutions to refrain from immediately recollecting loans and roll over expiring loans. It also demanded that the banking sector allow KIKO terminations and shift KIKO-related losses as a long-term loan without collateral.

The banking industry is expected to hold a meeting today on how to support smaller companies damaged by KIKO.

lovesong@donga.com parky@donga.com