Some big firms to face cash flow problems

Several big firms are tightening their cash flow as a result of the eurozone crisis, coupled with the lack of a strong recovery in the U.S. market and a lackluster performance by the Chinese economy.

Adding to the strain are weak domestic demand and a property market slump, online stock information provider FN Guide said Sunday.

The companies have been stockpiling cash following the 2008 crisis triggered by the soured U.S. subprime mortgages but their reserves are being reduced fast.

FN Guide said 98 firms listed on the country’s main bourse, the Korea Composite Stock Price Index (KOSPI), will earn a combined “free cash flow” of 18.4 trillion won in 2012, down 53.8 percent from last year’s 40 trillion won.

Free cash flow is the amount of cash generated from business activities after subtracting taxes, operating expenses, investments and other expenditures.

A decline indicates that the overall financial situation among corporations is worsening, meaning that they may have to raise capital by borrowing money or issuing corporate bonds.

Fn Guide said 29 of those listed out of the 98 will likely see their cash flow deteriorate this year.

Korea Electric Power Corp. posted a free cash flow of 581 billion won in 2011. But the state-run utility firm is projected to face a cash shortage of 6.8 trillion won this year.

It means the company will have to raise 6.8 trillion won from other sources to finance its business activities.

Korea Gas Corp. will also likely suffer from a cash shortfall of 2.3 trillion won.

SK Telecom is expected to see its coffers short 1.6 trillion won in cash.

“Due to the prolonged European debt crisis, coupled with a slowdown in the U.S. and Chinese economies, local businesses will see their earnings decline sharply this year,’’ said an official at the Korea Chamber of Commerce and Industry (KCCI).

“Big businesses will see their financial soundness deteriorate. But they will still manage to survive through current difficulties. But many small-and medium-sized firms could face a life and death situation.’’

To overcome the worsening liquidity squeeze, companies have rushed to raise capital through bond issuance.

According to the Korea Securities Depository, firms issued corporate bonds worth 12.3 trillion won in June, up 26 percent from May.

It is in stark contrast to the two previous months. In both April and May, bond issuance fell compared to a month earlier. <The Korea Times/Lee Hyo-sik>

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