NICE Investors Service: "Credit Risk Continues to Rise for Petrochemical Companies... Restructuring Will Take Time"

On September 1, NICE Investors Service pointed out that the credit risk of petrochemical companies is steadily increasing due to the sluggish petrochemical industry and a structural oversupply. The agency noted that while each company is implementing self-rescue measures and there are even signs of industry-wide restructuring, it will inevitably take considerable time before these efforts yield tangible results.

Ji Hyeongsam, Senior Researcher at NICE Investors Service’s Corporate Evaluation Division, stated in the report "Petrochemicals - Prolonged Downturn Expands Restructuring and Deleveraging Burden," that "the profitability slump in the petrochemical industry continues."

Researcher Ji explained, "In 2025, large-scale new facility expansions are underway, particularly in China, and the potential delay in demand recovery due to the global economic slowdown further limits the possibility of additional spread improvement in the future." He added, "Prolonged weak operating cash flow is increasing the debt burden across the industry." As of the end of June, the combined net debt/EBITDA ratio of major petrochemical companies stood at 12.7 times, continuing its upward trend since the end of 2021.

In this report, Researcher Ji identified the main risk factors for petrochemical company creditworthiness as the burden of domestic market expansion, the slowdown in China’s economic growth and rising self-sufficiency in the Chinese petrochemical industry, the burden of business restructuring, and increased oil price volatility. Specifically, he assessed that the impact of facility expansion and rising self-sufficiency in China will be long-term factors, while the effects of deteriorating macroeconomic conditions and expanded restructuring burdens will be medium-term, and oil price volatility will be a short-term factor weakening the business foundation of the domestic petrochemical industry.

He said, "Recently, major petrochemical companies have strengthened their cash management by canceling or postponing investment plans and selling non-core business units. However, despite reduced CAPEX requirements, weak business performance is preventing companies from covering working capital and higher interest expenses with their own cash generation, which is expected to further increase their financial burden." He projected that the upward trend in credit risk for petrochemical companies is likely to continue.

In particular, Researcher Ji noted that although major companies such as LG Chem’s sale of its Water Solutions business, Lotte Chemical’s sale of a 40% stake in Lotte Chemical Louisiana, and Hyosung Chemical’s sale of its specialty gas business have sought to secure liquidity through self-rescue measures, their debt repayment capabilities have not shown meaningful improvement due to the continued industry downturn.

He emphasized the need for ongoing monitoring, stating, "Companies are securing large-scale liquidity by selling stakes in subsidiaries and entering into Price Return Swap (PRS) contracts, but considering the high interest rates of these contracts, there are inherent cash flow burdens. With industry recovery uncertain in the mid to short term, it may take time to secure final buyers and negotiate sale prices for the stakes being sold at maturity."

He also highlighted the trend of industry restructuring centered on facility integration within the same complexes. Researcher Ji said, "In the case of the Daesan Petrochemical Complex, major groups with significant petrochemical operations such as LG, Hanwha, Lotte, and HD Hyundai are all present in the region," adding, "If facility integration becomes a reality, it will serve as a meaningful precedent for similar integration efforts in other complexes such as Yeosu and Ulsan."

The government has also signed voluntary agreements with 10 major domestic NCC companies, requiring them to submit facility reduction plans totaling up to 3.7 million tons by the end of the year. This represents about 25% of the country’s total NCC capacity. As a result, there is a possibility of industry-wide restructuring. However, Researcher Ji pointed out that due to the complexity of interconnections among facilities within complexes and the challenges of negotiations, "it will take considerable time for the effects of restructuring to materialize as actual business and financial improvements."

By company, for LG Chem (AA+/Negative), he assessed, "Although the company is currently selling non-core assets and adjusting investment plans, investment spending exceeding operating cash flow has persisted for a long time, causing debt to rise rapidly, which is a burden on its credit rating." For Hanwha TotalEnergies (AA-/Negative, A1), he noted that limited improvement in operating cash generation means it will take time to improve debt repayment capability. He also added that, as there is a possibility of resuming major investment plans such as the development of eco-friendly energy products in the medium term, any related funding needs could again increase the company’s debt burden.

Regarding SK Geocentric (AA-/Negative, A1), he stated, "There are no large-scale new investment plans, and the company is pursuing portfolio rebalancing centered on non-core assets." He continued, "Depending on the progress of business restructuring plans, there is potential for reducing financial burden, but it will take time for a meaningful recovery in debt repayment capability." For Hanwha Solutions (AA-/Negative, A1), he noted, "After the second half of the year, tariff burdens on raw materials and semi-finished products for solar modules are expected to increase, and the implementation of the OBBBA Act (by the Donald Trump administration) will also have a negative impact on the growth of the solar power industry."

Additionally, for Hyosung Chemical (BBB/Negative, A3), which continues to post operating losses, he pointed out that despite recent efforts to boost liquidity, the remaining debt exceeds 1 trillion won, which is an excessive level.

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