As the year-end, set by the government as the restructuring "deadline" for the petrochemical sector, approaches, the possibility of credit rating downgrades for petrochemical corporations is coming into focus. The financial statements of some petrochemical corporations have already far exceeded the downgrade thresholds presented by credit rating agencies. There are concerns that unless financial structures improve quickly after business reorganization, credit ratings will be downgraded across the board in the first half of next year.
As of the 24th, a total of eight petrochemical corporations received a "negative" credit rating outlook from at least one of the three major domestic credit rating agencies (Korea Ratings, Korea Investors Service, NICE Investors Service). They are LG CHEM (AA+), SK Geocentric (AA-), Hanwha TotalEnergies (AA-), HD Hyundai Chemical (A), Yeochun NCC (A-), SK PIC Global (A-), SK Advanced (BBB+), and Hyosung Chemical (BBB).
A "negative" credit outlook means a high likelihood that the credit rating will be downgraded in the future. If a credit rating falls, higher interest rates apply when issuing bonds or taking out loans. In effect, fundraising becomes more difficult. Some loan contracts also include conditions requiring early repayment if the credit rating falls below a certain level.
HD Hyundai Chemical (A), which received a "negative" outlook from the three rating agencies in Jun. last year, has already met the downgrade triggers. Korea Ratings sets the downgrade triggers for HD Hyundai Chemical as net debt/earnings before interest, taxes, depreciation and amortization (EBITDA) of 6.5 times or higher, or a borrowing fund dependence ratio of 45% or higher. These are financial indicators that gauge how much of the liability can be repaid with cash generated from operations.
HD Hyundai Chemical's average net debt/EBITDA for 2022–2024 was 13.6 times, and the borrowing fund dependence ratio was 60%. As of the end of Mar., EBITDA came in at minus (-) 52.8 billion won, rendering the metric meaningless.
Yeochun NCC (A-), which was caught up in a default crisis in Aug., also received a "negative" outlook from two rating agencies. Yeochun NCC's liability ratio in the third quarter of this year was 345.82%, approaching the downgrade threshold (liability ratio over 350%) presented by Korea Investors Service.
On the 20th of this month, shareholder DL Chemical converted 150 billion won in Yeochun NCC lending into equity, working to improve the liability ratio. Hanwha Solutions also plans to proceed with a lending-to-equity conversion. This is because 210 billion won in corporate bonds mature in Mar. next year, and the business outlook remains poor.
If it falls to BBB, debt repayment pressure is expected to intensify. The redemption conditions for Yeochun NCC's 79th and 80th unsecured private bonds include a clause that "a downgrade to BBB+ or below on corporate bonds" constitutes an event of default (EOD). The 77th and 85th private bonds carry a condition that they are linked when the benefit of time is lost on any one corporate bond.
SK Advanced (BBB+) and Hyosung Chemical (BBB) have also received "negative" outlooks. They already fall into speculative grade, so institutional investors have little appetite for their corporate bonds.
Major petrochemical corporations are planning business reorganizations, targeting up to 3.7 million tons (t) of capacity cuts based on NCC by the end of this year. As interests between corporations are sharply divided, no corporation has submitted a self-rescue plan so far.
Yu Jun-wi, senior researcher at Korea Ratings, said, "For petrochemical corporations, it is more important to assess how much they change after restructuring than whether they have met downgrade triggers," and noted, "We plan to reflect the time required and effectiveness of business reorganization in the credit ratings in the first half of next year."
Lee Seong-won, head of IS at NICE Investors Service, said, "It is true that the outlook for the petrochemical industry is not good. There is no other momentum besides business reorganization. We will review the self-rescue plans corporations present by year-end and, as early as the first quarter of next year, may adjust credit ratings."