'Petrochemical, Steel, Aviation, Hotel'... Industries Hit Hard by COVID-19 Plunge Sharply

Controversy Over Rapid Downgrade of Corporate Credit Ratings
Mass Downgrades of Financial Firms in 2007
Real Economy Contraction...Concerns Over Funding Shortages
High Possibility of Financial Market Spillover
"Performance Deterioration Becomes Apparent from Second Half...Preemptive Measures Needed"

[Asia Economy Reporter Park Jihwan] This year, most of the companies whose credit rating outlooks were downgraded by credit rating agencies were those hit hard in their performance by the novel coronavirus infection (COVID-19). In particular, due to the pandemic caused by COVID-19, not only key industries such as oil refining and steel but also industries directly affected by movement restrictions and consumption shocks, such as airlines and hotels, were no exceptions. Experts pointed out that preemptive measures must be prepared to prevent the downgrade of corporate credit ratings due to the contraction of the real economy from leading to financial difficulties and further impacting the financial market.

According to the financial investment industry on the 22nd, recently, credit rating agencies have conducted mass rating downgrades for oil refining companies that posted large operating losses in the first quarter of this year. Korea Ratings downgraded the credit rating outlooks of SK Innovation, SK Energy, S-OIL, and SK Incheon Petrochem from 'Stable' to 'Negative.' In the case of Hyundai Oilbank, the rating outlook was changed from 'Positive' to 'Stable.'

Hong Seokjun, a researcher at Korea Ratings, said, "In the first quarter of this year, a sharp drop in crude oil prices and refining margins caused large operating losses for oil refining companies," adding, "Poor performance linked to crude oil prices, refining margins, and the supply-demand situation of major products is expected for the time being." Since the impact of COVID-19 on demand is expected to continue for a considerable period, it is judged that additional credit adjustments are inevitable due to the overlapping of weak demand and oversupply of major products in the future.

Steel companies also experienced a relay of credit rating downgrades by rating agencies. NICE Investors Service downgraded the rating outlooks of POSCO, Hyundai Special Steel, and SeAH Besteel. Korea Ratings also lowered POSCO's rating outlook from positive to stable. This is because the steel industry has generally experienced a deteriorated supply-demand environment since last year, compounded recently by demand slowdown due to the spread of COVID-19. The slowdown in production in the domestic finished car industry, a front-line industry, is also negative. Due to the slump in the finished car industry, the rating outlooks of auto parts companies such as Seoyon E-Hwa and MS Autotech were also downgraded.

Jung Iksoo, a senior researcher at Korea Ratings, analyzed, "Although raw material prices stabilized this year, the COVID-19 pandemic caused a sharp decline in demand, production disruptions, and export restrictions in major front-line industries, significantly shrinking global steel consumption," adding, "Especially from the second quarter, when the impact of COVID-19 is expected to intensify, there are concerns about further price declines in steel products due to worsening oversupply."

The credit impact on hotel and leisure-related companies was also significant. Hotel Shilla and Hotel Lotte received credit rating downgrade review outlooks, and Paradise and Hanwha Hotels & Resorts had their rating outlooks changed to negative. Airlines are experiencing the worst crisis. Even Korea Air, the top airline, was once pushed to the brink of survival due to a sharp drop in travelers caused by COVID-19, prompting rating agencies to consecutively issue credit rating downgrade review outlooks.

On the other hand, in the second half of 2007, just before the full onset of the financial crisis, a mass downgrade relay of credit ratings occurred among financial companies such as card companies, securities firms, and capital companies, fitting the name 'Global Financial Crisis.' At that time, NICE Investors Service lowered the rating outlooks of Daishin Securities, Samsung Card, Hyundai Card, and Mirae Asset Capital from 'Positive' to 'Stable.' Korea Ratings also changed the outlooks for Samsung Card and Hyundai Card from positive to stable. During this period, among the 37 companies whose ratings and rating outlooks were downgraded by both NICE Investors Service and Korea Ratings, 20 companies, or 54%, were financial companies.

Hwang Sewoon, a researcher at the Korea Capital Market Institute, explained, "During the global financial crisis, the collapse of Lehman Brothers caused financial companies with related transactions to fall like dominoes," adding, "Unemployment surged globally in the financial sector, and this impact rapidly spread to the entire real economy." Since money did not circulate from financial companies, which are the source of funds, a comprehensive contraction occurred from corporate production activities to business operations.

There are voices calling for preparation against the possibility that the real economy crisis triggered by the recent COVID-19 situation could spill over into the financial market. A financial sector official said, "It is still difficult to say that the COVID-19 situation has had a significant impact on the entire financial sector, including banks and insurance companies, except for large securities firms that experienced margin call collateral issues in March," adding, "Currently, COVID-19-related loans are being executed, and from the second half of this year or the first half of next year, when corporate performance deterioration may become visible, COVID-19-related defaults or delinquencies may appear."

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