Korea Investors Service has lowered Yeochun NCC's unsecured bond credit rating by one notch from A- (negative) to BBB+ (stable). The company's commercial paper rating was also downgraded from A2- to A3+. The prolonged downturn in the petrochemical industry, which has driven continued losses, along with a deteriorating financial structure and increased reliance on funding support from shareholders, served as the key grounds for the downgrade.
Korea Investors Service said Monday that it was lowering the credit rating on Yeochun NCC's unsecured bonds, including the 84-2 series, from the previous A- (negative) to BBB+ (stable), and its commercial paper rating from A2- to A3+. "The financial structure has deteriorated as the loss trend has become prolonged due to the impact of the industry downturn," the agency said. "Reliance on shareholder funding support has increased, and despite an earnings rebound in the second quarter this year, we expect the earnings slump to persist over the medium to long term."
The core background to the downgrade is the slump in the petrochemical industry. Since the second half of 2022, the earnings slump has become prolonged as a global economic slowdown, a rise in China's self-sufficiency rate, and large-scale facility expansions have converged. Yeochun NCC's operating loss last year was 251.4 billion won, with the scale of losses widening again, marking four consecutive years of operating losses and net losses. In the first quarter of this year, the company failed to return to profit despite a rise in oil prices stemming from the fallout of the U.S.-Iran war, posting an operating loss of 24.2 billion won.
Financial burdens are also weighing on the company. Although capital was bolstered in November last year when 300 billion won in shareholder loans was converted into equity, the agency judged that the debt burden relative to earning power remains heavy. As of the end of March, net debt on a separate basis stood at 1.4824 trillion won, with a net debt/EBITDA ratio of 16.4 times on an annualized basis using first-quarter earnings before interest, taxes, depreciation, and amortization (EBITDA). The debt-to-equity ratio was 222.8%, and the borrowing dependency ratio was 58.4%.
Reliance on shareholder support is also rising. Yeochun NCC conducted a 200 billion won rights offering in March last year, followed by a total of 300 billion won in loans from both shareholders in August of the same year, which were converted into equity in November. The company also refinanced 210 billion won in corporate bonds maturing in March this year into asset-backed loan (ABL) borrowings through credit reinforcement from shareholders. "Considering the current scale of EBITDA generation and the slow outlook for profitability improvement, its independent debt repayment capacity has deteriorated," Korea Investors Service assessed.
In the short term, the possibility of an earnings rebound in the second quarter this year was raised. The agency forecast that the company could temporarily post an operating profit, helped by the use of naphtha secured at low pre-war prices, strong selling prices due to reduced supply, and the government's cost subsidy policy. However, it saw a strong likelihood that profitability would decline again from the second half, as the spreads on major petrochemical products returned to pre-war levels after May and downstream demand weakened amid high oil prices and an economic slowdown.
Liquidity management was also cited as a key monitoring factor. Creditor financial institutions are providing financial support, including raising Yeochun NCC's import letter of credit limit by $300 million on the 18th of last month, so the maturity refinancing of bank borrowings is expected to proceed without difficulty. However, the 30 billion won 79th series and 10 billion won 80th series corporate bonds meet the conditions for mandatory early redemption if the credit rating falls to BBB+ or below. As this downgrade has increased Yeochun NCC's liquidity management burden, Korea Investors Service plans to strengthen its monitoring of whether repayments are made within the deadline and of the liquidity situation.
