Posco Rating Cut by Moody’s on Concern Steelmaker’s Debt Is High

Posco (005490) had its credit rating lowered one level to the second-lowest investment grade by Moody’s Investors Service on concern South Korea’s largest steelmaker will struggle to cut debt amid a tough sales environment.

“Persistent weakness” in Asia’s steel industry will probably prevent Posco from making a significant improvement in profit margins, the credit ratings company said today in a statement. It downgraded Posco’s foreign currency bond rating to Baa2 from Baa1.

Posco Chief Executive Officer Chung Joon Yang earlier this month offered to step down at least a year before his contract runs out, saying the company needs new leadership to cope with “challenging business conditions.” The steelmaker reported a slump in third-quarter profit last month and cut its 2013 sales forecast for a second time as slowing growth in China and recessions in Europe curbed steel demand, dragging down prices.

“Posco’s high level of debt, the challenging fundamentals it faces in the steel industry and significant uncertainties about its ability to implement significant de-leveraging measures are key factors behind the rating downgrade,” Chris Park, a Moody’s vice president and senior credit officer, said in the statement.

Seeking Improvement

Posco is the latest of Asia’s biggest steel makers to be downgraded as the global industry is in a slump due to oversupply, Choi Woo Seok, a Posco spokesman, said by phone in Seoul after the Moody’s announcement.

“We still have the highest credit rating among steel companies with blast furnaces,” Choi said. “We are trying our best to improve profitability and improve finances by cutting costs, selling assets, and so on.”

Moody’s expects Posco’s debt to remain “elevated” and weak for the previous Baa1 credit level over the next one to two years, the ratings company said.

The credit rating could be revised up if Posco improves its earnings and debt ratio, and cuts its investment spending, Moody’s said.

To contact the reporter on this story: Yuriy Humber in Tokyo at yhumber@bloomberg.net

To contact the editor responsible for this story: Jason Rogers at jrogers73@bloomberg.net

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