Concerns grow on credit downgrades in Korean companies

[Photo by Lee Seung-hwan]

Concerns grow as the credit rating outlook of corporate bonds issued by South Korean companies remain dim in the second half after experiencing a decline in the first six months of this year.

Corporate credit ratings have a direct impact on fundraising activities, and with the expectation of high interest rates persisting for some time, the lowered credit ratings could affect financial operations.

According to the credit rating report for the first half of this year released on Monday by Korea’s three major credit rating agencies Korea Investors Service, Korea Ratings, and NICE Investors Service, the proportion of downgraded credit ratings was notably high.

Among the 509 companies evaluated for long-term corporate bond credit ratings by Korea Investors Service, 11 companies experienced downward adjustments, surpassing the number of upward adjustments (7 companies).

Similarly, Korea Ratings reported that 15 companies saw a decline in their long-term ratings, outnumbering the companies with improved ratings (5 companies).

NICE Investors Service had a balanced distribution between upgrades (12 companies) and downgrades (11 companies).

The ratio of credit rating upgrades to downgrades, which provides an indication of the trend in corporate credit ratings, has been on a decline since reaching its peak last year.

Over the past five years, NICE Investors Service recorded a ratio of 0.53 in 2019, 0.47 in 2020, 0.64 in 2021, 1.65 in 2022, and 1.09 in the first half of 2023.

The concerning factor is the lack of positive outlook.

According to Korea Ratings, the negative outlook (35 companies) outweighed the positive outlook (16 companies) by a significant margin as of June 30.

When compared to the situation at the end of last year (11 companies with a positive outlook and 26 companies with a negative outlook), the number of companies with negative outlook has increased.

Credit rating agencies have expressed a dim view of key industries such as petrochemical, construction, display, and financial businesses.

“With the tight monetary policy expected to persist in the near term, unfavorable macroeconomic conditions, including delays in the commencement of new projects and increased risk of unsold housing units, as well as the rise in project financing (PF) risks and the burden of operating funds, indicate a non-supportive industrial environment for the construction sector,” said Seo Chan-yong, director of evaluation policy at NICE Investors Service.

Korea Ratings said the rating outlook for some sectors, including shipbuilding and aviation, machinery and defense, food and beverage, and apparel, has improved, but no sector is in a favorable business environment as of the end of June, as it was at the end of last year.

The financial industry was particularly concerned.

“As of the end of June, there are six cases of negative outlook and downward review, outweighing the positive outlook and upward review cases (four cases),” said Noh Jae-woong, head of the financial evaluation department at Korea Investors Service.

“Considering the unfavorable financial environment such as real estate project financing, risks of alternative overseas investments, and household debt, there is additional downward pressure on credit ratings,” Noh added.

Given the upcoming maturity of large-scale bridge loans, potential investment losses for Korean financial institutions due to declining commercial real estate asset values in the U.S. and Europe, and the possibility of financial losses due to persistently high interest rates, experts warn that credit ratings for non-bank financial institutions such as securities, cards, capital, and savings banks could decline.