As the likelihood of an interest rate hike in the United States increases, domestic companies are expected to adjust their funding strategies. Rising rates are intensifying borrowing burdens, while financial authorities are tightening scrutiny on capital increases, narrowing funding options.
With the Federal Open Market Committee (FOMC) meeting taking place on September 15-16, financial officers within companies are feeling heightened tension. If U.S. interest rate decisions impact domestic market rates and the bond market, conditions for new funding and refinancing existing loans could change. Companies with large borrowings or a high proportion of variable-rate loans will feel the effects of rising rates more acutely.
Although banks have not yet raised the threshold for corporate loans, prolonged interest rate increases could lead to differences in lending conditions based on a company's creditworthiness and financial health. While financially sound companies may still have access to funding, those with lower credit ratings or weaker cash flows will face increased interest burdens and deteriorating financial stability.
Raising funds through capital increases is also becoming challenging. The Financial Supervisory Service (FSS) is closely examining the necessity of large capital increases, the intended use of funds, and alternative funding methods. For instance, Hanwha Solutions initially planned a capital increase of 2.4 trillion won but reduced it to 1.7 trillion won after two rounds of corrections requested by the FSS. In this process, the amount allocated for debt repayment was also decreased from the original plan, and additional measures such as the sale of non-core assets and capital-raising strategies were incorporated into the securities registration statement.
As large capital increases become more difficult, companies find it challenging to secure necessary funds in one go. They must also consider the dilution of existing shareholders' equity due to new share issuance.
Other funding options beyond bank loans and capital increases include convertible bonds (CB), bonds with warrants (BW), and private placement bonds. However, instances of companies misusing these instruments for debt repayment or management defense have led to increased regulatory scrutiny, similar to capital increases.
Alternative funding methods may also incur burdens in terms of costs and conditions. CBs and BWs can alter capital structures if converted into shares or if warrants are exercised, while private placement bonds often require higher costs than standard corporate bonds, depending on investor demands.
Consequently, there are predictions that the ability of companies to secure funding will become increasingly polarized during periods of rising interest rates. Large corporations with ample cash reserves and high credit ratings can choose relatively favorable funding methods, while financially weaker companies may be tempted to resort to questionable funding practices.
Rising funding costs are also expected to negatively impact investment decisions. Companies looking to invest in facilities or new businesses will have to reassess expected returns and funding costs as interest rates rise. Projects with lower profitability or longer payback periods are more likely to see delays or reductions in scale. If existing business expansions or research and development (R&D) investments are conducted conservatively, it could adversely affect corporate growth potential.
Kim Dae-jong, a professor at Sejong University, stated, "As interest rates rise, corporate investment contracts, ultimately impacting employment and economic growth rates. It is crucial for the financial market to maintain stable liquidity and credit supply to prevent corporate funding from being obstructed."
* This article has been translated by AI.
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