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Corporate credit rating downgrades show struggling Korea Inc.
Lotte Chemical's plant in Yeosu, South Jeolla Province / Courtesy of Lotte Chemical
By Jun Ji-hye
Korean companies are experiencing a broad-based decline in credit ratings, with more downgrades than upgrades recorded in the first half of this year, according to credit rating agencies and market analysts Tuesday.
They said this downward trend is likely to continue in the second half, as the domestic economy remains sluggish. With widening performance gaps between sectors, credit downgrades are expected to persist, particularly in industries facing structural headwinds, such as petrochemicals, construction and secondary batteries.
Data compiled by Korea's three major credit rating agencies — Korea Ratings, Korea Investors Service (KIS) and NICE Investors Service — revealed that the credit rating upgrade-to-downgrade ratio stood at 0.79 in the first half of the year, indicating that downgrades outpaced upgrades. This marks the third consecutive year the ratio has remained below 1.
International credit rating agency S&P Global Ratings also noted in its recent report that the credit outlook for major Korean companies has worsened compared to the previous year.
As of June last year, among the 39 domestic firms rated by S&P, 5 percent had a positive outlook, 87 percent were stable and 8 percent negative.
By June this year, however, the share of companies with a stable outlook fell to 85 percent, while those with a negative outlook nearly doubled to 15 percent. No companies held a positive outlook.
While high-performing sectors such as shipbuilding and defense saw some positive ratings reviews, a wave of downgrades hit petrochemicals, construction and savings banks, which are still struggling with poor market conditions or the ongoing impact of real estate project financing.
Credit downgrades were notably concentrated among affiliates of Lotte Group and SK Group, largely due to the underperformance of their core business sectors.
A prolonged slump in the petrochemical industry, driven by U.S. trade tariffs, oversupply from China and weakening global demand, has heavily impacted these companies, both of which have significant exposure to the sector.
During their semiannual reviews, Korea's three credit rating agencies all downgraded Lotte Chemical's credit rating from AA to AA-. The downgrade also negatively affected Lotte Group’s overall consolidated credit standing.
SK Group's headquarters in Seoul / Courtesy of SK Group
SK Group has also been flagged as a major credit concern, following increased financial pressure since last year. Several of its petrochemical affiliates, including SKC, SK Advanced and SK Geo Centric, have faced downgrades or negative revisions to their credit outlooks.
Korea Investors Service downgraded SKC's rating from A+ to A. Despite a solid performance in SKC's semiconductor division, the downgrade was driven by weaker results in the chemical and secondary battery sectors.
"Due to heightened price competition stemming from China's oversupply, the secondary battery materials sector is unlikely to return to its profit levels seen before 2022," Kim Ho-seop, a researcher at KIS, said.
The gloomy sentiment will likely continue in the second half of the year, with 91 companies facing a negative ratings outlook, significantly outnumbering the 54 companies with a positive outlook.
Kim Sang-in, an analyst at Shinhan Securities, noted, "There is a possibility that downgrade pressures will intensify again due to lingering domestic and international risk factors."