Posco downgrade roils bond market

The downgrade of Posco’s credit rating by a local agency has triggered alarm in the country’s corporate bond that is concerned about a domino effect.

The credit rating of Posco, Korea’s largest steelmaker, was cut to AA+ from AAA last week by Korea Investors Service (KIS), the first downgrade by the firm in 20 years.

The credit rating downgrade indicates it might be more difficult for the company to issue bonds due to higher interest rates and costs.

KIS said it lowered the rating because the steel industry’s profitability is eroding, while Posco’s dominance in the market is decreasing with the rise of other companies. It also questioned whether Posco has the ability to pay off its 28 trillion won ($27 billion) in debt.

Korea Ratings and NICE Investors Service last week also lowered their speculation on Posco’s rating from “stable” to “negative,” a sign they could downgrade the steel conglomerate’s credit rating within a few years.

After Posco slipped from the top rating, Hyundai Motor, SK Telecom and KT are the only companies - excluding state-run and financial companies - rated AAA by local credit agencies.

Analysts said that the downgrade of Posco’s rating could be a warning sign for AA+ rated companies.

“Because Korea’s No. 1 and the world’s No. 4 steelmaker Posco received an AA+ rating, companies that don’t have similar competitiveness but have AA+ ratings will be pressured to maintain their status,” said Hana Daetoo Securities researcher Kim Sang-hoon in a recent report. “This rating evaluation signals returning to a normal phase in which a company’s rating will be lowered if its quantitative standard is below average, even though its qualitative standard is important.”

Analysts predicted Posco’s affiliates with AA+ ratings will be the first target, since subsidiaries’ ratings are affected by the financial soundness of the company. Currently, Posco Energy has an AA+ rating.

Companies that have big gaps between ratings from overseas (Fitch, Moody’s and S&P) and local credit rating agencies are also expected to see their ratings go down.

Some analysts have criticized Korean credit agencies for giving generous ratings to local companies.

“Ratings firms were hesitant on downgrading credit ratings because Posco was born as the state-run company and the steel was regarded as the country’s key industry,” said Kim. “It is very normal to see that company’s deteriorating fundamentals reflected in its credit rating.”

While Moody’s demoted Posco’s credit rating to Baa2 in November, Posco’s credit rating from local credit agencies stayed at AAA. The Baa2 from Moody’s is equivalent to local credit raters’ BBB0, their ninth-highest rating.

So far, there are about 20 companies with AA+ ratings by local credit rating companies.

After Posco’s decline, three to four companies that are in struggling industries like oil and chemicals and have seen their foreign ratings slip are expected to be downgraded by local agencies.

For instance, LG Electronics and GS Caltex saw their credit ratings go from Baa3 to Baa2.

But local credit rating agencies say their evaluations differ from foreigners’ point of view, although the process is getting more thorough. They emphasize that so-called rating inflation isn’t happening.

According to data from Shinhan Investment, three local investors raised credit ratings for 98 companies, while lowering 39 in 2010. But last year, they raised 49 companies, while downgrading 61.

“For instance, Posco is a big exporter and that is regarded as positive by local agencies, but foreign agencies see the company as still in the steel industry, which is exposed to fluctuations,” said an official from KIS. “After Tongyang Group issued fraudulent corporate bonds and commercial paper, Financial Supervisory Services inspections have been thorough and we have been carefully conducting our process.”

BY JOO KYUNG-DON [kjoo@joongang.co.kr]