Korea Inc. Suffers Ratings Hangover After $104 Billion M&A Bingeby
Corporate yield premiums rising this year amid rating concern
M&As often hurt finances in short-term, NH Investment says
South Korean companies are suffering a debt ratings hangover after they responded to a faltering economy with the biggest mergers and acquisitions binge in a decade.
Lotte Chemical Corp.’s AA+ local rating was placed on negative rating review by Fitch Ratings Ltd.’s local affiliate after announcing plans to buy Samsung Group’s chemical businesses for 2.8 trillion won ($2.4 billion) on Oct. 30. Homeplus Co.’s commercial paper rating was cut to A2+ from A1 after Tesco Plc sold its Korean unit to MBK Partners Ltd. The country’s largest mobile operator SK Telecom Co.’s rating outlook was revised to stable from positive on Nov. 4 by Standard & Poor’s after it announced the acquisition of CJ Hellovision Co.
The value of acquisitions and other deals involving South Korean companies jumped 30.6 percent to $104 billion in the past year, according to Bloomberg-compiled data. The credit scores of the companies are worsening at the fastest pace in at least a decade as the export-led economy falters. Korea Ratings Corp., the local affiliate of Fitch, cut the credit scores of 40 local borrowers in the first half and raised the ratings of 5, the worst ratio since 1999.
"M&As typically have a negative impact on companies’ financial stability in the short-term as they involve cash outflow or leverage increases," said Kim Eun Gie, Seoul-based credit analyst at NH Investment & Securities Co., the nation’s biggest brokerage by assets. "The point is how much they can generate in cash returns from the purchase compared to the acquisition price."
The spread for three-year AA- rated won-denominated corporate bonds has widened 13 basis points to 47 this year amid mounting rating downgrades.
Lotte Chemical’s one-year default probability has risen 0.06 percentage point since the acquisition announcement to 0.27 percent on Monday, the highest since Feb. 2014, according to Bloomberg’s default-risk model that takes into account company finances and stock moves. The cost to protect notes of SK Telecom has increased 10 basis points to 101 on Monday, according to data provider CMA, since its announcement of the purchase on Nov. 2.
The credit rating of Homeplus’ commercial paper was cut to A2+ from A1 on Oct. 30 by Korea Investors Service, a local affiliate of Moody’s Investors Service. KIS said the financial burden of the retailer and its affiliates increased after they were acquired by private-equity firm MBK Partners Ltd. from Tesco Plc.
Lotte Chemical’s recent acquisition is long-term oriented, its spokesman said on Monday. SK Telecom declined to comment. Two calls to Homeplus’s spokesperson went unanswered Monday.
"Industrial restructuring is needed for Korean companies to increase efficiency and control excessive competition," said Choi Jong Won, Seoul-based credit analyst at Samsung Securities Co. "The problem is, there’s no proper protection for bond investors when such M&As affect the companies’ creditworthiness," he said, adding that the previous Samsung-Hanwha deal is one example.
Samsung Group recently sold off stakes in its chemicals and defense businesses including Samsung Techwin Co. for 1.9 trillion won to Hanwha Group. It completed the transaction earlier this year. The local rating of Samsung Techwin was hurt. The company, now called Hanwha Techwin Co., was cut to AA- from AA after its major shareholder changed.
The South Korean government is encouraging corporate restructuring for key industries including steel, petrochemicals, construction and shipping. Korean companies are seeing a continued decline in profits and deterioration in fiscal stability, according to an e-mailed statement from the Financial Services Commission on Sunday.
The Bank of Korea lowered its 2015 economic growth forecast to 2.7 percent last month and reduced its inflation estimate while holding the key interest rate unchanged at a record low. Exports fell 15.8 percent last month from a year earlier, the most since 2009.
"With the government’s urging to restructure, companies seem to be searching for preemptive measures to survive in a low-growth world by M&As," said Park Jin Young, Seoul-based credit analyst at HMC Investment Securities Co. "M&As don’t always have a negative impact on ratings, but they frequently occur especially among struggling companies, raising investor concerns."