Global rating agency Standard & Poor's (S&P) has warned that the credit ratings of South Korean companies can be downgraded this year.
S&P released a report on South Korean companies on March 19. “The credit ratings of South Korean companies seem to have entered a cycle of gradual decline from the second half of last year after three years of improvement from 2015 to 2017. South Korea’s major companies will be in a greater danger of credit rating downgrades over the next year.”
S&P added, “These companies’ financial policy, which has become more aggressive after 2015, is a major cause of pressure on credit rating downgrades. This can be confirmed in an increase in major firms’ investment spending, shareholder return, including dividend, and continuous mergers and acquisitions (M&As).”
It also said, “The global slowdown in demand for major industries, such as semiconductors, smartphones and vehicles, weighs on these companies amid concerns over trade disputes and protectionism. The credit rating of South Korean firms will be under pressure to be downgraded over the next 12 months.”
S&P warned of the possibility of South Korean companies’ credit rating downgrades because their business environment has been evidently worsened and their financial policy is excessively aggressive. Semiconductor companies, which propped up the nation’s exports, are suffering a sharp drop in profits and some companies, including Hyundai Mobis Co., are experiencing a large cash outflow due to the expansion of shareholder returns.
In particular, S&P cited Hyundai Mobis and SK E&S Co. as a classic example of the expansion of shareholder returns. Hyundai Mobis announced its shareholder return plan worth 2.60 trillion won (US$2.30 billion), such as expansion of dividends and repurchase and retirement of treasury stocks, until 2021. Considering the fact that the annual dividends came to 300 billion won to 400 billion won (US$265.25 million to 353.67 million) over the years, a considerable amount of money will be drained, according to S&P.
SK E&S is expected to pay 400 billion won to 600 billion won (US$353.67 million to 530.50 million) of dividends a year over the next two years. S&P said, “The company’s capacity to maintain the current credit rating will be reduced for the next 24 months.” The total amount of SK E&S’ dividends in 2019 stood at 672 billion won (US$594.16 million), showing a big jump from a yearly dividend of100 billion won to 300 billion won (US$88.42 million to 265.25 million)in recent years.
In addition, S&P said, “The increase in investment costs and continuous M&A move can also adversely affect the company’s credit rating.” It raised the possibility of the financial burden of SK Telecom Co. and KCC Corp., which expand investments in new business through an M&A. S&P said, “SK Telecom acquired ADT Caps Co. for 702 billion won (US$620.69 million) last year as part of its new growth engine strategy and its consolidated debts reach 1.70 trillion won (US$1.50 billion). The company’s spending will significantly increase over the next two years with the burden from the 5G investment.
Previously, S&P placed KCC on “credit watch negative.” KCC jointly acquired U.S.-based Momentive Performance Materials Inc., the world’s second largest manufacturer of silicone, quarts and ceramics, for US$3 billion (3.39 trillion won) through a consortium in September last year. There is a possibility that the deal will worsen KCC’s financial statements.