Korea Ratings Deteriorate Most in Decade as Export Engine Stalls

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The creditworthiness of South Korean companies is worsening at the fastest pace in at least a decade as the export-led economy falters.

Korea Ratings Corp., the local affiliate of Fitch Ratings Ltd., cut the credit scores of 40 local borrowers in the first half and raised the ratings of 5, the worst ratio since 1999. Similar scores at Nice Investors Service and Korea Investors Service were the weakest since 1998 and data going back to 2004 respectively.

Shipbuilding, oil refining, chemicals and steel were among industries with the most downgrades as exports fell for six months and manufacturers’ business confidence slid to the lowest since 2012. Overseas sales were curbed by cooling growth in China and a weaker yen that helped Japanese rivals, while a Middle East Respiratory Syndrome outbreak hurt demand at home.

“Korea is highly dependent on exports and basically economic growth for major importers of Korean goods is weak except for the U.S, resulting in oversupply,” said Jung Won Hyun, head of rating policy team at Korea Ratings in Seoul. “The downgrade trend will likely remain for a while.”

In a sign of continued pressure, Korea Ratings had a negative outlook on 24 companies as of June 30 compared with positive outlooks on only nine. For Korea Investors Service, an affiliate of Moody’s Investors Service, those numbers were 18 versus four.

‘More Sensitive’

The Bank of Korea trimmed its 2015 economic growth forecast to 2.8 percent and held its benchmark interest rate at a record low this month. The government said on July 3 that Korea will release 15 trillion won ($12.9 billion) through an extra budget to support businesses.

Stress is evident across the $1.4 trillion economy. Samsung Electronics Co., the crown jewel of South Korea’s biggest business conglomerate, has endured seven quarterly operating profit drops as it struggled to lure enough customers away from Apple Inc. and Chinese rivals. Hyundai Motor Co.’s sales have fallen for three straight months.

“Ratings companies have become more sensitive to companies’ earnings when it comes to grading,” said Kim Eun Gie, Seoul-based credit analyst at NH Investment & Securities Co. “Worsened earnings coupled with ratings companies’ tightening standards made the worst upgrade to downgrade ratio this year.”

Shipmaker Slump

The ratings of Korea’s three biggest shipbuilders -- Hyundai Heavy Industries Co., Samsung Heavy Industries Co. and Daewoo Shipbuilding & Marine Engineering Co. -- were downgraded this year amid falling earnings due to offshore-rig projects. The three posted a combined 4.8 trillion won in operating losses in the second quarter. Ships accounted for 8.5 percent of the country’s total exports through June 20 of this year, according to the trade ministry.

Daewoo Shipbuilding, which had an A+ rating at the start of the year, was cut to BBB+ by Korea Ratings on July 24 after saying it suffered large losses. NIS downgraded the company to BBB on Thursday.

Firms with incomes falling short of debt servicing costs for three straight years rose to 3,295 in 2014, or 15.2 percent of the total, from 12.8 percent in 2009, according to the BOK.

Credit scores are a lagging indicator of the economy and the downgrades reflect an accumulation of poorer earnings, said Choi Hyung Wook, head of the credit policy team in Seoul at Korea Investors Service.

“Many large companies have undergone restructuring as their competitiveness weakened,” Choi said. “The downward trend will likely continue but I’d say the worst is behind us.”

There are also some companies whose credit quality is improving. The ratings of SK Hynix Inc. and LG Innotek Co. rose to AA- from A+ in the first half on better profitability.

“The Korean economy is dependent on China, whose growth engines seem to be losing steam,” said Pi Kyung Won, head of ratings criteria at Nice Investors Service in Seoul. “Companies need to improve their financial profile through turnaround plans, plus they should be cautious about increasing leverage without financial buffers.”