[Bank of Korea Financial Stability Report]

Zombie firm share hits 19.1% at end of last year

Real estate, metal products see sharpest rises

Weak liquidity conditions; market-based borrowing climbs

Vulnerability seen building in underperforming sectors

An aerial view of the Daesan petrochemical complex in Seosan, South Chungcheong Province. This image is not directly related to the article. [Herald DB]
An aerial view of the Daesan petrochemical complex in Seosan, South Chungcheong Province. This image is not directly related to the article. [Herald DB]

The share of companies unable to cover their interest payments with operating profit reached its highest level on record at the end of last year, Bank of Korea data showed Tuesday. Analysts say stronger soundness management is needed for vulnerable sectors, along with orderly restructuring of firms at high risk of insolvency.

According to the Bank of Korea's Financial Stability Report for September, released Tuesday, zombie firms — those subject to external audits — accounted for 19.1 percent of all such companies by number as of end-2025, up 2 percentage points from 17.1 percent a year earlier. The figure is the highest since the central bank began compiling the data in 2010.

A zombie firm is defined as one whose interest coverage ratio has remained below 1 for three consecutive years, meaning the company has paid out more in interest over those three years than it has earned in profit.

Broken down by size, the zombie firm share rose among both large companies and small and medium-sized enterprises — from 13.7 percent to 15.5 percent for large firms, and from 18 percent to 20 percent for SMEs.

By sector, the share climbed across most industries. Real estate posted the steepest rise, jumping from 39.4 percent to 43.7 percent, followed by metal products, which surged from 8 percent to 11.6 percent. Construction (11.7 percent to 12.1 percent), petrochemicals (11.1 percent to 12.8 percent) and wholesale and retail trade (10.7 percent to 13.4 percent) also saw increases.

Measured by financial institution lending, the zombie firm share fell from 21.7 percent in 2023 to 15.6 percent in 2024 before rebounding to 21.2 percent last year. Both large firms and SMEs saw their shares rise, with SMEs recording a sharper increase — from 19.2 percent to 28.9 percent — compared with large firms, which rose from 14 percent to 18.2 percent.

Across lender types, the zombie firm share expanded at both banks and non-bank institutions. Non-bank lenders saw a far steeper rise, climbing from 16.6 percent to 27 percent, compared with banks, which rose from 15.1 percent to 18.4 percent. Non-bank lenders' share of total financial institution loans to zombie firms also increased, from 38.2 percent to 42.2 percent.

By sector, the sharpest increases in zombie firm exposure were concentrated in export industries facing structural headwinds — including petrochemicals and metal products — as well as wholesale and retail trade, all grappling with global oversupply and other structural problems. The petrochemical sector was particularly hard hit: after a brief boom in 2021 and 2022, structural weakness set in from 2023, and the zombie firm share in the sector surged roughly 2.6-fold, from 14 percent in 2024 to 36.1 percent last year.

Zombie firms also face fragile liquidity conditions. Their cash and cash-equivalent assets accounted for just 6.6 percent of total assets — roughly 60 percent of the 11 percent ratio seen at non-zombie firms — leaving them with limited financial buffers. Their current ratio stood at 77.2 percent, below the 100 percent threshold, meaning short-term liabilities exceed assets that can be converted to cash within a year. A sudden increase in repayment demands in the near term could trigger a liquidity crunch.

Zombie firms have also grown increasingly reliant on market-based borrowing, defined as the share of market-sourced debt in total borrowings. "Given that market-based financing is relatively sensitive to changes in market interest rates and investor sentiment, the rising dependence of zombie firms on such funding suggests that the likelihood of liquidity risk materializing could increase if market conditions shift abruptly — for instance, if credit wariness intensifies," the Bank of Korea said.

At least one indicator offers some relief: the share of zombie firms at imminent risk of insolvency has been declining. That share fell for two consecutive years after peaking at 45.3 percent in 2023, reaching 38 percent last year. Measured by financial institution lending, it dropped from 33.7 percent to 26.1 percent over the same period. The Bank of Korea attributed the improvement to rising equity ratios across zombie firms overall and a partial easing of profitability weakness.

The central bank said it expects the zombie firm share to decline this year compared with last, as economic conditions improve despite higher interest rates, but cautioned that sectoral divergence remains a concern. "Given the continued divergence across sectors, vulnerabilities may accumulate further in industries with weak business conditions," it said, adding that lenders should strengthen credit monitoring and soundness management for vulnerable sectors, paying close attention to the rising interest burden from higher market rates and the refinancing risk facing firms heavily reliant on market-based borrowing.

The Bank of Korea added that orderly restructuring support should be provided for zombie firms at high risk of insolvency, while steps should be taken to prevent excessive risk aversion from spreading across corporate financing markets, so that credit can continue to flow stably to financially sound companies.


kimstar@heraldcorp.com
forest@heraldcorp.com