Credit Consequences
Concerns are growing over the financial costs of Korea’s Big Three shipbuilders caused by the deterioration of their business performance and drop in their credit ratings. On Aug. 31, the Korea Investors Service lowered the credit rating of Hyundai Heavy Industries from “AA-” to “A+” and brought down its outlook on the credit rating from “stable” to “negative.” Those corporate bonds and commercial papers of Hyundai Samho Heavy Industries and Hyundai Mipo Dockyard were adjusted from “A+” and “A2+” to “A” and “A2,” respectively. Samsung Heavy Industries and Daewoo Shipbuilding & Marine Engineering saw their credit ratings fall around the same time, too. Korea Ratings took down the credit rating of Samsung Heavy Industries from “AA-(negative)” to “A+(negative),” and that of Daewoo Shipbuilding & Marine Engineering from “BBB+(negative)” to “BBB(negative).” The Korea Investors Service warned Daewoo Shipbuilding & Marine Engineering that the credit rating company may additionally lower Daewoo's credit ratings.
The point is that such credit rating adjustments lead to a change in interest rates. If a credit rating is high, the interest rate will fall. But otherwise, the interest will rise. At a time when some projects may be delayed, they are facing a vicious cycle where a drop in credit ratings will weaken expectations for the inflow of cash and make cash drain more likely. According to bond yields announced by the Korea Financial Investment Association on Aug. 28, the average interest rates of three-year corporate bonds were 2.031 percent for those of AA- companies and 2.432 percent for those of A+ companies. The two rates are 0.401 percentage points apart. In the case of Daewoo Shipbuilding & Marine Engineering, its credit rating fell to BBB, raising the interest rate of its three-year corporate bonds by 1.050 percentage points to 6.563 percent from 5.513 percent.
The balances of the three shipbuilders’ corporate bonds and commercial papers added up to approximately 6.6 trillion won (US$5.6 billion). Even if the interest rate rises merely 0.5 percentage points due to lowered credit ratings, it will financially cost the three about 33 billion won (US$28 million) more a year. The financial burden is relatively light for Samsung Heavy Industries, since the balance of its corporate bonds is around 1.4 trillion won (US$1.2 billion). But Daewoo Shipbuilding & Marine Engineering may face a cash crunch now that its corporate bonds and CPs total around 2.665 trillion won (US$2.261 billion). The financial industry is still very skeptical about the future of the three’s offshore plant business. This means that financial firms cannot rule out the possibility that the three will suffer additional drops in their credit ratings around 2018, when they will complete the deliveries of offshore plants that have already been ordered.