"Concerns Over Deterioration of PF Asset Soundness Due to Real Estate Slump" Construction and Finance Credit Ratings Decline

'Joseon·Automobile' Improve
Top 3 Credit Rating Agencies' Regular Credit Rating Review for Second Half
'Companies Burdened by Real Estate PF vs Companies with Industry Improvement' Diverging Fortunes

The three major domestic credit rating agencies (Korea Ratings, NICE Investors Service, and Korea Investors Service) raised the credit ratings of companies in the automobile, shipbuilding, and power equipment sectors in their regular credit evaluations for the second half of this year, but lowered the credit ratings of companies in the construction, chemical, and financial sectors. Notably, the group of companies with deteriorated credit ratings included many secondary financial sector firms such as construction companies directly affected by the real estate market downturn, securities firms, and capital companies suffering from project financing (PF) defaults.

Deterioration of Credit Ratings for Construction, Securities, and Capital Firms Due to Real Estate PF Defaults

The credit rating agencies changed the credit outlooks of companies such as Shinsegae Construction, M Capital, Daol Investment & Securities, Hi Investment & Securities, and Daishin F&I from ‘positive’ to ‘stable’ or from ‘stable’ to ‘negative’ in the second half of this year. Credit rating outlooks indicate the direction of a company’s creditworthiness. A worsening financial situation could lead to a downgrade of the credit rating.

Most of these companies are linked to the downturn in the real estate market. Korea Ratings evaluated Shinsegae Construction by stating, "Due to the real estate market downturn, operating losses continue, and the low sales rates at construction sites in Daegu mean that cash flow is unlikely to improve significantly in the short term." As of the end of September this year, among the KRW 330 billion worth of construction contracts Shinsegae Construction is carrying out in Daegu, the average sales rates for projects such as Villiv Heritage, Villiv Lucent, and Villiv Radice are only in the 20% range.

NICE Investors Service changed M Capital’s credit outlook from ‘positive’ to ‘stable’, citing the high cost of financing and a significant possibility of PF losses. They expressed concern that asset quality could deteriorate further in PFs with extended maturities amid the ongoing real estate slump. Among securities firms, the credit outlooks of Daol Investment & Securities, Hi Investment & Securities, and Daishin F&I were also adjusted due to concerns over bridge loan PF defaults with extended maturities. Although Daol Investment & Securities’ credit rating seemed to improve following the sale of its subsidiary Daol Investment, the continued deterioration of PF asset quality nullified the benefits of the affiliate sale.

Separately from real estate PF issues, the group of companies with deteriorated credit ratings included those in the petroleum and chemical sectors. In the second half of this year, SK Advanced’s credit rating was downgraded one notch from A (negative) to A- (stable), and Hanwha TotalEnergies maintained its AA rating but its credit outlook changed from ‘stable’ to ‘negative’. This reflected expectations that poor business conditions would continue to depress performance and that improvement would be difficult in the short term.

Credit Ratings Rise for Hyundai Heavy Industries Affiliates, Automobile, Shipbuilding, and Power Equipment Sectors

In contrast, credit rating agencies raised or upgraded the credit outlooks of Hyundai Heavy Industries group companies due to improvements in the shipbuilding market. HD Hyundai Heavy Industries, HD Hyundai Construction Equipment, and HD Hyundai Infracore saw their credit ratings rise from A- to A, while Hyundai Samho Heavy Industries’ rating increased from BBB+ to A-. HD Hyundai and HD Hyundai Electric maintained their ratings at A and A- respectively, but their credit outlooks changed from ‘stable’ to ‘positive’. This indicates a higher likelihood of credit rating upgrades next year if performance and financial structures improve.

Following the reopening (resumption of economic activities), the credit ratings of Hanjin KAL and Korean Air, whose performance and financial structures rapidly improved, were upgraded from BBB+ and BBB to A- and BBB+, respectively. Notably, Korean Air returned to an A rating for the first time in eight years after falling to the BBB level, enabling it to reduce funding costs for corporate bond issuance and other financing activities.

Among automobile parts companies, Hwashin showed signs of credit improvement. Hwashin’s credit rating was maintained at BBB in this regular evaluation, but its credit outlook changed from ‘stable’ to ‘positive’. NICE Investors Service raised Hwashin’s credit outlook, stating, "With the recovery in finished vehicle demand, Hwashin, a first-tier supplier to Hyundai Motor Company, has improved its cash generation capacity and financial structure," and added, "This trend is expected to continue for some time."

A credit rating agency official said, "Credit rating agencies conduct regular evaluations of companies’ commercial paper (CP) and short-term bond credit ratings in the second half of the year, and while assessing short-term credit ratings, they also evaluate long-term credit ratings and credit outlooks. Most companies whose credit ratings were adjusted in the second half’s short-term credit rating evaluations had their rating directionality previously announced, so the market’s expectations were not significantly deviated from."

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