Three Major Shipbuilders Regain 'A-Grade' Credit Ratings... An Exceptional Recovery Among Heavy Industries

Hanwha Ocean Upgraded from BBB+ to A-,
Samsung Heavy Industries Also Raised in June
HD Hyundai Heavy Industries Holds A+ with ‘Positive’ Outlook
Cash Flow and Profitability Improve Together as Orders Rise
Petrochemical and Steel Sectors Face Rating Defense Challenges

The domestic shipbuilding industry, which has emerged as a core sector in the South Korea-United States alliance, has entered a credit rating upgrade cycle. With Hanwha Ocean’s credit rating raised to A- (Stable), all three major shipbuilders have now entered or maintained the ‘investment grade’ range of A- or higher. This marks the first time in over a decade that all three domestic companies-HD Hyundai Heavy Industries, Samsung Heavy Industries, and Hanwha Ocean-have received investment grade ratings. Industry experts note that as low-priced, loss-making orders are phased out and order structures shift toward high value-added vessels, profitability and financial indicators are showing a full-fledged recovery.

According to industry sources on November 24, Korea Investors Service (KIS) recently upgraded Hanwha Ocean’s unsecured bond credit rating from BBB+ (Positive) to A- (Stable). The company’s commercial paper (CP) rating was also raised from A3+ to A2-.

KIS cited the following reasons for the upgrade: ▲ an increase in the order backlog centered on high-priced vessels, ▲ improvement in operating margin due to enhanced productivity, and ▲ recovery of operating cash flow. This marks the first time in ten years that the company has regained an A rating since its days as Daewoo Shipbuilding & Marine Engineering in 2015. Daewoo Shipbuilding & Marine Engineering had previously received a ‘CCC’ rating from KIS and NICE Investors Service in 2017 following massive losses.

The shipbuilding industry’s unique long-term production process has created a time lag in performance improvements over the years, but signs of recovery have become apparent this year. In particular, since most of the indicators underlying the rating upgrades reflect structural improvements, analysts believe there is a high likelihood of further upgrades going forward.

Samsung Heavy Industries was also upgraded from BBB+ to A- (Stable) by NICE Investors Service in June. Since then, both Korea Investors Service and Korea Ratings have maintained the A- (Stable) rating. Samsung Heavy Industries has seen its operating cash flow normalize and its order backlog turnover more than double, as large-scale orders for liquefied natural gas (LNG) carriers placed since 2020 began to be delivered this year. Most of the low-priced order backlog has been resolved. Credit rating agencies have assessed that “the company has moved away from a structure of operating losses and is strengthening its profit base.” Samsung Heavy Industries had recorded operating losses for more than eight consecutive years, but since last year, both its operating cash flow and free cash flow have remained positive. In particular, as the large-scale LNG carrier orders placed since 2020 have entered the delivery phase this year, the company has entered a phase of improved cash flow.

Aerial view of HD Hyundai Heavy Industries (above) and HD Hyundai Mipo Dockyard ahead of their merger. Photo by Yonhap News Agency

HD Hyundai Heavy Industries maintains the highest rating among the three companies at A+. Recently, Korea Investors Service raised its outlook from ‘Stable’ to ‘Positive.’ In the third quarter of this year, HD Hyundai Heavy Industries posted consolidated sales of 4.4179 trillion won and operating profit of 557.3 billion won, representing year-on-year increases of 22.4% and 170.4%, respectively. HD Hyundai Mipo Dockyard also showed growth, with sales of 1.3003 trillion won and operating profit of 200.8 billion won, up 20.7% and 470.5%, respectively, compared to the same period last year. Credit rating agencies expect that, once the merger between HD Hyundai Heavy Industries and HD Hyundai Mipo Dockyard is completed next month, the benefits of cost structure stabilization and enhanced order competitiveness will materialize in earnest.

The credit rating upgrades in the shipbuilding industry stand in contrast to other heavy and chemical industries such as petrochemicals and steel. Korea Ratings and NICE Investors Service have successively downgraded the credit ratings of major petrochemical firms including Lotte Chemical, SK Advanced, and Hyosung Chemical. The direct causes are deteriorating profitability due to oversupply from China and the Middle East, as well as the burden of a strong dollar. In the steel industry, POSCO and Hyundai Steel have maintained their ratings, but with industry stagnation and rising costs, there is little room for upgrades, making rating defense a key issue.

However, risks remain for the shipbuilding sector. As a project-based industry, shipbuilding is characterized by significant volatility in the profitability of individual contracts. Cost variables such as fluctuations in raw material prices (including thick steel plates), rising labor costs, and increased outsourcing expenses for block fabrication can have a short-term impact on profitability. A credit rating agency researcher explained, “While cash flow and profit generation have improved, the industry is highly sensitive to external variables given its fixed cost structure and process complexity. Even after the rating upgrades, risk management capabilities will remain a crucial evaluation criterion.”

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