POSCO E&C Faces Imminent Credit Downgrade... All Three Major Rating Agencies Signal Possible Lowering

POSCO E&C recorded a loss of nearly 200 billion won in the third quarter of this year, prompting the nation’s three major credit rating agencies to issue warnings that the company’s credit rating may be downgraded. It is highly unusual for all three agencies to simultaneously publish cautionary reports about the same construction company. Analysts point out that a series of safety accidents is now escalating into financial risks.

Song Chi-young, President of POSCO E&C, conducting an on-site company-wide management meeting. He is shifting the meeting room-centered culture to an on-site-centered one. POSCO E&C.

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According to the credit rating industry on October 31, Korea Ratings, NICE Investors Service, and Korea Investors Service recently stated in their reports that “POSCO E&C’s large-scale losses are a direct manifestation of safety accident risks translating into financial burdens,” and that they will “review whether to downgrade the credit rating based on the company’s performance and financial structure.”

The agencies assessed that, compared to the current credit rating (all three agencies rate POSCO E&C as A+), the company’s operational and financial burdens have increased significantly. They also announced plans to closely examine the confirmed third-quarter results, specific loss details, and changes in the financial structure, and to reflect these in their credit ratings.

A credit rating is a score that assesses a company’s ability to repay borrowed funds. If this score drops, it becomes more difficult and expensive for the company to borrow money from banks or the market. According to POSCO Holdings’ disclosure on October 27, POSCO E&C posted an operating loss of 194.7 billion won on a consolidated basis in the third quarter of this year. This marks the second consecutive quarter of losses, following a 90.8 billion won loss in the second quarter. As a result, cumulative operating losses for the first three quarters have ballooned to 261.6 billion won. Korea Investors Service projected, “An additional loss of around 230 billion won is expected next quarter,” and anticipated, “The annual operating deficit in 2025 will exceed 400 billion won.”

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The large-scale losses were primarily driven by a series of safety accidents. Korea Investors Service explained, “After a fatal accident at Section 10 of the Hamyang-Ulsan Expressway, all construction sites suspended work for about a month to conduct safety inspections, resulting in a temporary revenue gap.” The agency added, “Losses related to the Sinansan Line accident and the suspension of construction were also reflected in the third-quarter results.”

Local real estate and overseas markets also contributed to the deteriorating performance. Korea Ratings noted, “Bad debt expenses related to unsold properties in regional areas such as Daegu, as well as additional costs from the Warsaw incineration plant project in Poland, were also included in the results.”

POSCO E&C’s financial health has also sharply declined. The company’s practice of “virtually zero debt management” for five consecutive years since 2020 has completely collapsed this year. Net borrowings (on a consolidated basis), which stood at minus 26.7 billion won at the end of 2024, surged to 809.1 billion won as of the end of June this year, putting the company back into net debt. NICE Investors Service evaluated, “The debt ratio stands at 136.1%, and the net borrowing dependency ratio is 10.1%, indicating a rapid deterioration of the financial structure.”

Due to worsening performance and financials, POSCO E&C has already met the criteria for a credit rating downgrade by the agencies. The company’s cumulative operating margin for the first three quarters of this year is -5.1%, which is far below Korea Ratings’ downgrade review threshold (operating margin below 3%). It also meets the downgrade conditions of NICE Investors Service (EBITDA-to-sales ratio of 4% or less) and Korea Ratings.

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Furthermore, POSCO E&C must repay a total of 265 billion won in corporate bonds within the next five months. The company plans to use existing cash reserves to repay 100 billion won in bonds maturing in November. However, the key issue is whether it can repay the 165 billion won in bonds coming due in March next year. Based solely on cash and cash equivalents (5.978 billion won as of the end of June), the company appears to have some leeway, but the pace of cash outflow is concerning. Cash flow from operating activities turned negative in the first half of this year, with a net outflow of 701.5 billion won. Cash flow reflects the actual movement of money, not just book figures. A negative figure means the company is spending more than it earns, causing its bank balance to shrink.

If cash reserves are insufficient, the company may consider issuing new bonds to refinance existing ones. However, if the credit rating is downgraded, there may be no investors willing to lend money. In fact, after the collapse accident at Hwajeong I-Park in Gwangju in 2022, HDC Hyundai Development Company saw its credit rating drop from A+ to A and was effectively shut out of the corporate bond market for years. Only recently has it begun to attempt public bond issuance again. Market observers predict that POSCO E&C may ultimately have no choice but to seek support from its parent company, POSCO Holdings.

Korea Ratings warned, “If negative perceptions regarding brand credibility and construction capability persist due to repeated accidents and administrative sanctions, the company’s fundamental business competitiveness could be undermined by disruptions in new order activities and a decrease in order volume.” The agency added, “Weaker investor sentiment could also affect the refinancing conditions for borrowings and project financing (PF) contingent liabilities.” NICE Investors Service also analyzed, “A decline in external credibility due to accidents could worsen the funding environment, making it more difficult to refinance PF guarantees and corporate bonds, thereby weakening short-term financial flexibility.”

Meanwhile, POSCO E&C is pouring company-wide efforts into safety, following POSCO Group Chairman Chang Inhwa’s declaration of a “safety-first management” principle. Recently, Song Chi-young, President of POSCO E&C, and all executives have visited sites where serious industrial accidents occurred on four occasions to conduct “on-site company-wide management meetings,” shifting the company’s traditional meeting room-centered culture to an on-site-centered one. A POSCO E&C official stated, “Frankly, it would not be surprising if our credit rating is downgraded immediately, so we are concerned. However, our top priority right now is to become a company where safety comes first and second.”

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