Posco Rating Lowered by Fitch as High Debt Cuts Credit Metrics

Posco had its credit rating lowered one level to the second-lowest investment grade by Fitch Ratings Ltd. because of high capital expenditure and rising debt at South Korea’s largest steelmaker.

Fitch doesn’t expect “significant improvements” in margins at the company’s steel business as the industry faces severe over-capacity coupled with a slow recovery in global demand, the credit ratings company said today in a statement. It downgraded Posco’s long-term issuer default rating and senior unsecured rating to BBB from BBB+.

It follows Moody’s Investors Service downgrade last month of the company to the second-lowest investment grade. Posco Chief Executive Officer Chung Joon Yang last 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 downgrade reflects Posco’s deteriorating credit metrics caused by higher levels of debt and moderate profitability, Fitch said. The outlook for the rating is stable, it said.

The steelmaker reported a slump in third-quarter profit in October 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 possesses a large portfolio of equity investments, valued at approximately 4 trillion South Korean won, part of which it can liquidate if needed,” Laura Zhai, a Fitch analyst, said in the statement.

In 2013, Posco’s capital expenditure is expected to be 8 trillion won ($7.5 billion), up from 7.2 trillion won in 2012, Fitch said. It expects the steelmaker to spend at least 6 trillion won over the next two years in line with its capacity expansion plans.

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