As the prolonged economic slump leads to an increase in bankrupt corporations, analysis suggests that this year the true competitive strength of investment banks (IB) will emerge in Yeouido's securities sector. This is due to the expansion of corporations' funding needs, coupled with the contraction of real estate project financing (PF), which was previously an easier source of revenue. A fierce competition among securities firms is anticipated in corporate finance, commonly referred to as investment banking. Securities firms have also completed preparations, such as strengthening related organizations.
Typically, during an economic recession, investment banking personnel at securities firms become busier. This is because the demand for funding and restructuring needs from corporations seeking to survive increases. Unlike banks that simply lend money, investment banks at securities firms assist corporations in raising necessary funds through bond issuance or capital increases (增資). For corporations to utilize funds through stocks or bonds, these volumes must circulate smoothly in the market, which is also the role of investment banking teams at securities firms.
◇ Record-high bankrupt corporations… Surge in corporate funding needs
Corporations of all sizes are experiencing an economic climate as harsh as during the foreign exchange or financial crises. This year, the so-called 'corona bill' will hit as many struggling corporations that have been living off policy funds go bankrupt. The ability of corporations to withstand the unprecedented shock from COVID-19 was thanks to policy funds with low-interest rates. For those that can withstand the crisis, domestic recovery is essential; however, the situation worsened rather than improved with the outbreak of martial law at the end of last year.
The plight of corporations at the brink is corroborated by statistics. The number of bankrupt corporations nationwide from January to November last year was 2,729, setting a record high. The number of corporate bankruptcy applications filed by small and medium enterprises in courts was 1,745, with rehabilitation applications totaling 984.
The so-called 'marginal corporations' that cannot even cover loan interest with profits earned over three years (operating profit) continue to increase. According to the Bank of Korea, the proportion of marginal corporations is expected to have reached a historic high of 16.4% by the end of 2023, suggesting that this figure may have increased further last year.
The corporate bond market atmosphere is relatively decent. Currently, companies that have issued corporate bonds are successfully experiencing the 'beginning-of-the-year effect'. However, due to the effects of economic downturn and rising exchange rates, whether non-investment grade corporate bonds can raise sufficient funds remains uncertain.
If companies cannot raise funds through corporate bonds, they need to borrow loans. However, banks are in a situation where they need to retrieve the policy funds they released in large amounts right after COVID-19. Corporations in desperate need of funds have no choice but to look towards restructuring that includes issuing mezzanine securities (convertible bonds and bonds with warrants), capital increases, and asset sales.
◇ Securities firms strengthen IB divisions as work increases during recession
In a situation where the corporate economy is worsening across industries, securities firms are seeing increased workloads. The IB division of securities firms, which oversees funding and restructuring through mergers and acquisitions, is experiencing a boom as the demand for funds increases amidst worsening corporate liquidity.
Securities firms have already significantly strengthened their IB divisions through organizational restructuring. KB Securities, NH Investment & Securities, and SK Securities have undergone organizational restructuring to reinforce their corporate finance teams, focusing on mergers and acquisitions (M&A), initial public offerings (IPO), debt capital markets (DCM), and equity capital markets (ECM). Not only large firms but also smaller firms like SK Securities and LS SECURITIES are expanding their IB organizations.
It is noteworthy that the related markets are freezing as a result of the real estate market recession and the impact of bad debts, leading to a contraction of high-risk PF businesses that used to generate high commissions in a short period. Securities firms, which had strengthened their real estate PF teams just a few years ago, have shifted their focus to strengthening corporate finance teams. A prime example is MERITZ Securities, which recently recruited Jeong Yeong-chae, a former president of NH Investment & Securities, and Song Chang-ha, a former head of syndication at NH Investment & Securities, who is known as an IB expert.
A representative from a large securities firm said, 'The role of investment banking is to accurately evaluate the growth potential and risks of corporations that are not reflected in credit ratings and to turn the debt issued by corporations into an investment-worthy product.' He noted that a securities firm's investment banking capabilities take time to develop, as they are built over a long period in the corporate finance sector, making it difficult to secure such expertise in the short term. This indicates that the capabilities of securities firms' investment banking are now under serious scrutiny.