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Moody's Investors Service says the credit quality of most of Moody's-rated Korean non-financial corporates will remain largely stable over the next 12 months despite a year-on-year decline in earnings in 2014.
"The stable credit outlook for most Korean companies mainly reflects our expectation that their level of financial leverage is likely to improve moderately," says Chris Park, a Moody's Senior Vice President.
This expectation reflects Moody's assumptions that: (1) many Korean companies' earnings will improve in 2015 in the absence of adverse external factors, such as Korean won's further appreciation and further sharp falls in oil prices; and (2) for some companies in the steel and refining industries, lower capital expenditure levels will enable them to reduce their debt.
Park was speaking on Moody's just-released special comment on Korean non-financial corporates titled, "Modest Leverage Improvement in 2015 Supports Credit Quality". The report is co-authored by Park and Wan Hee Yoo, a Moody's Vice President and Senior Analyst.
About two thirds of Moody's-rated Korean corporates -- excluding unlisted government-related issuers -- reported a year-on-year decline in operating profit in 2014.
"The main reasons for this deterioration were the strong won, sluggish domestic consumption, squeezed commodity spreads in the region and the sharp falls in crude oil prices," says Park. "In 2014, the extent of deterioration was most severe for refining companies."
By contrast, in 2015, Moody's views the current environment -- with oil prices now settled at lower levels -- as modestly positive for many Korean companies, particularly those in the refining, petrochemical and integrated utilities sectors.
However, oil and gas exploration and production companies and construction firms, the latter of which have large exposure in the Middle East, will be hurt by lower crude prices.
Moody's expects most Korean corporates to maintain their current ratings over the next 12 months, given their stable credit profiles.
A further appreciation of the won, weaker-than-expected industry fundamentals, and further weakness in domestic consumption are the key risks to this assumption.
SK E&S (Baa1 negative) is vulnerable to downward rating pressure, given its increased financial leverage and large capital expenditure. Lotte Shopping (Baa2 stable) and E Mart (Baa2 stable) also have limited financial cushions at their rating levels.
In contrast, the three rated auto companies -- Hyundai Motor (Baa1 stable), Kia Motors (Baa1 stable) and Hyundai Mobis (Baa1 stable) -- and others, such as KCC (Baa2 stable), LG Electronics (Baa3 stable) and SK Hynix (Ba1 stable), will remain well positioned at their rating levels, given their low financial leverage and/or robust cash flows.
Subscribers can access the report at http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_1003357.
