Why Did OCI and Hanwha Solutions' Credit Ratings Get Downgraded?

[Asia Economy Reporter Minji Lee] Credit ratings of solar power and chemical companies are being downgraded one after another. This is based on the judgment that the financial structure was affected as the burden of borrowings increased due to performance slowdown caused by the impact of the novel coronavirus infection (COVID-19).

Polysilicon

According to the credit rating industry on the 2nd, NICE Credit Rating and Korea Ratings recently downgraded OCI's credit rating. The rating was lowered from A+ to A. In addition, NICE Credit Rating adjusted the outlook of Hanwha Solutions' credit rating (AA-) from stable to negative.

OCI's main reason was cited as the weakening of overall business competitiveness due to the reduction of the polysilicon business. Last month, the company stopped operating the domestic polysilicon production line as the polysilicon business environment deteriorated due to subsidy reductions in China and capacity expansions by Chinese companies. The domestic production line accounts for 66% of the total production volume (79,000 tons), including the Malaysian subsidiary. Instead, the company plans to produce semiconductor-grade polysilicon from the second quarter, but it is judged that it is insufficient to prevent losses in the polysilicon sector due to the high intensity of competition in the business.

In particular, financial burdens increased due to the reflection of impairment losses on tangible assets (746.3 billion KRW) caused by the suspension of operations at the Gunsan plant. Continuous operating losses and process improvement investments at the Malaysian plant caused net borrowings to increase from 542.1 billion KRW in 2018 to 860.9 billion KRW last year, lowering the company's ability to respond based on its own cash generation capacity.

Yoo Junwi, a researcher at Korea Ratings, explained, "Considering the reduction of the polysilicon business and weak demand for carbon chemicals, the recovery of operating cash flow is limited," adding, "Although demand contraction is expected due to global economic slowdown and COVID-19, polysilicon oversupply continues, limiting the recovery of financial stability." OCI is expected to record an operating loss of 42 billion KRW in the first quarter of this year. Polysilicon prices maintained $9 per kg at the beginning of last year but are expected to remain around $7 this year.

Hanwha Solutions' downgrade in outlook was attributed to the high uncertainty in its core industries, solar power and petrochemical industries. Both businesses require continuous investment to maintain technology and production capacity considering the intensity of competition within the industry, but it is judged that investment is difficult with the current financial condition.

According to NICE Credit Rating data, as of the end of last year, the company's net borrowings amounted to 5.1 trillion KRW, and the borrowing burden relative to cash generation capacity increased significantly from 3.7 times in 2017 to 7 times. The debt ratio also increased from 120% to 170% during the same period. In particular, total borrowings on a consolidated basis reached 6.2 trillion KRW, with borrowings due for repayment this year amounting to 2.9 trillion KRW.

Lee Hyukjun, a researcher at NICE Credit Rating's Corporate Evaluation Division, explained, "Although efforts to improve the financial structure, such as asset securitization, are underway to alleviate the borrowing burden, it is judged that the high borrowing burden relative to cash generation capacity will continue."

This content was produced with the assistance of AI translation services.