"Nine Petrochemical Firms Posted Over 1 Trillion Won in Combined Operating Losses Last Year"...Can They Protect Their Credit Ratings?

Last year, the combined operating loss of nine petrochemical companies exceeded 1 trillion won, putting additional pressure on credit rating agencies. They now face a heavier burden in their regular reviews, where they must decide whether to reflect rating downgrades. The agencies agree that securing liquidity and successfully refinancing market-based borrowings will be crucial to defending creditworthiness. They are also stepping up monitoring of these petrochemical firms’ liquidity buffers and financial response capacity.
According to Korea Investors Service (KIS) on the 13th, the combined operating loss of nine domestic petrochemical companies in the fourth quarter of last year reached 1.2082 trillion won. This represents a severe deterioration in profitability compared with the previous quarter, when they posted a combined operating profit of 350.5 billion won.
The nine petrochemical companies are LG Chem, Lotte Chemical, SK Geo Centric, Kumho Petrochemical, SKC, HD Hyundai Chemical, Yeochun NCC, SK Advanced, and Hyosung Chemical.
KIS stated, "As losses widened in the fourth quarter of last year, the combined operating loss of the nine companies for the full year came to 1.0187 trillion won."
Kim Ho-seop, a research fellow at KIS, analyzed, "The primary reason for the sharp earnings decline in the fourth quarter of last year was that LG Energy Solution, which accounts for a large share of the combined profit and loss, swung to an operating loss." LG Energy Solution is a subsidiary of LG Chem.
He went on to explain, "Until the third quarter of last year, LG Energy Solution saw quarterly operating profit grow on the back of rising production and sales volumes in North America and the resulting expansion of production tax credits. However, in the fourth quarter it recorded an operating loss due to the end of advance payment support for U.S. electric vehicle (EV) purchases and a decline in EV battery sales, as customers cut year-end inventories."
He added, "Even excluding LG Energy Solution, the performance of petrochemical companies was very weak." Sluggish demand, capacity expansions in China, and seasonal off-peak factors overlapped, narrowing spreads for major products.
Analysts also pointed out that large impairment losses on tangible and intangible assets, driven by a weaker business outlook, weighed on net income and financial structure. LG Chem and Lotte Chemical each recorded impairment losses of more than 1 trillion won. LG Chem recognized about 1.9 trillion won in impairment losses due to revised outlooks for its petrochemical and battery materials businesses. Lotte Chemical also booked impairment losses of around 1 trillion won, similar to the previous year.
Won Jong-hyun, a senior director at KIS, said, "Recognizing impairment losses is an accounting expense that does not immediately involve cash outflows, but it is an adjustment that reflects a real decline in asset value, such as weaker future cash flows, and it will act as a factor that worsens key financial stability indicators, including the debt ratio."
He continued, "As the downturn in industry conditions drags on, companies’ capacity to respond is gradually being depleted," adding, "We also see widening gaps in resilience between individual companies."
He further stressed, "The financial capacity to withstand what appears to be at least another one to two years of industry weakness will be a key factor differentiating downward pressure on credit ratings," and added, "In our regular reviews, we plan to focus on how concretely companies are executing their plans to control financial burdens and secure liquidity, as well as whether they are drawing up any additional measures."
NICE Investors Service likewise assessed in a report, "Given the uncertainty over when the industry will recover and the time required to carry out restructuring, an individual company’s financial response capacity is expected to be one of the key factors in defending its credit rating in the short term."
khj91@fnnews.com Reporter Kim Hyun-jung Reporter