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| KCC headquarters in Seocho-gu, Seoul |
By Nam Hyun-woo
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| KCC Chairman Chung Mong-jin |
In addition, the construction materials maker is reeling from a contracted housing market that has failed to meet expectations over the past year, prompting credit agencies at home and abroad to downgrade its credit rating.
Moody's Investor Service has downgraded KCC's rating to Baa3 from Baa2, and placed it on a negative outlook.
The agency has been reviewing KCC with the intention of lowering its rating since September, when the housing materials firm announced the bid to acquire Momentive, the world's No. 2 silicone maker.
Standard & Poor's Global Ratings also cut KCC's rating to BBB- from BBB, citing rising leverage from the Momentive acquisition; although it kept its outlook stable.
The moves came hours before KCC announced Thursday that it had finished payments to acquire a 45.5 percent stake in Momentive and managing rights for the majority of its businesses.
A consortium comprised of private equity fund SJL Partners, KCC and Wonik QnC invested 3.5 trillion won to buy the firm.
KCC said it will "secure [its] international reputation and competitiveness by nurturing silicone businesses," but analysts have cast doubts over the claim due to the company's increased debt and weakened earnings.
"We believe the acquisition will help KCC's core operations," S&P analyst Shawn Park said. "However, the acquisition's imminent impact on its financial metrics is likely to be negative."
Park said S&P expects the company's adjusted debt to rise to 4.5 trillion won in 2019, compared with its previous estimate of 1.3 trillion won.
Moody's analyst Sean Hwang said, "The rating downgrade reflects KCC's elevated financial leverage and increased exposure to the cyclical and competitive silicone industry."
"Given the incremental debt funding and an expected weakening in KCC's earnings, Moody's estimates the consolidated entity will have a debt to EBITDA ratio of around 5, compared with 3.4 that KCC reported in 2018."
EBITDA is earnings before interest, tax, depreciation and amortization, which indicates a company's capacity to generate cash flow. A higher rate shows a company is heavily indebted compared to its earnings.
"KCC will accelerate its debt reduction by monetizing part of its non-core assets," Hwang said. "Material debt reductions through the sales could improve KCC's financial metrics, although uncertainty remains as to the timing and scale of such sales."
However, the company's weakening earnings are dragging down its ability to quickly reduce the debt incurred for the Momentive acquisition.
According to KCC, it posted 22.8 billion won in operating profit for the first quarter, down 58.9 percent from a year earlier. Its sales also fell 14.7 percent to 781.7 billion won during the same period.
"What's noticeable in KCC's first quarter earnings is that the numbers have plunged because of drops in its plants' operating ratio. There were no one-off events to drag the company down," KB Securities analyst Chang Moon-joon said.
"Investors should lower their expectations for KCC, because it is hard to expect a rapid improvement in Korea's softening housing construction market."
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