Conglomerates’ cash conditions to worsen amid global slowdown

A majority of Korean companies, including blue chips, listed on the stock market, are expected to see their free cash flow decline due to the global economic slowdown, said FNGuide, an online financial information service provider.

It has estimated that free cash flow of 98 listed companies will fall to 18.4 trillion won on average this year, or 53.8 percent down from about 40 trillion won at the end of last year.

Almost 80 percent of the 98 listed companies will see a drop in their free cash flow, which is money immediately available after paying for facility investment and bills for daily operations. Such left over cash resources are used to pay debts, dividends and expansion.

One-third of firms are likely to face a cash crunch.

SK Telecom, LG Display and Korea Electric Power Corp. are among the listed conglomerates whose cash flow conditions are expected to worsen as Korea, which heavily depends on exports for growth, braces for a slowdown this year.

Free cash flow of SK Telecom, Korea’s biggest mobile carrier, will fall into the negative territory at minus 1.58 trillion won this year, from 1.6 trillion won a year ago.

KEPCO, the state-run electric power distribution company, is expected to have a minus 6.8 trillion won in free cash flow, from 581 billion won during the same period. LG Display, Korea’s second largest display panel maker, is estimated to see its flow drop to 163 billion won, from 540 billion won.

This means that companies are spending more than they earn, or seeing cash outflow exceeding inflow.

Around 20 listed conglomerates, including CJ CheilJedang, Hyundai Hysco, LG Uplus, Samsung C&T and Doosan Heavy Industries, have been named by FNGuide as likely to face worsening cash conditions.

Analysts said that companies faced with shortages of cash would head for the debt market to raise funds.

However, the Korea Exchange noted that companies’ debt payback capability measured by interest coverage ratio dropped to 4.3-fold in the first quarter of this year, compared to 5.6-fold a year ago, despite an increase in debt financing.

Issuances of debt securities reached over 12 trillion won last month, up 26 percent from a month earlier, according to Korea Securities Depository.

Analysts said that companies’ worsening financial conditions are in part attributable to the slowdown in Europe, the U.S., and China, Korea’s major export destinations.

The Bank of Korea revised down the country’s growth projections to 3 percent this year, from its initial 3.5 percent, after the central bank opted to growth than taming inflation by cutting down its key interest rate last week.

Its GDP forecast is below the Ministry of Strategy and Finance’s 3.3 percent.

By Park Hyong-ki (hkp@heraldcorp.com)