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December 09, 2019

Moody's warns S. Korean firms of excessive investments, M&As

PUBLISHED : November 19, 2019 - 16:26

UPDATED : November 20, 2019 - 09:29

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The excessive level of committed investments and acquisitions of South Korean nonfinancial companies add to the negative outlook for 2020, coupled with a slowing economy at home and abroad and downside risks due to the global trade tensions, credit analysts said Nov. 19.

Of the 24 private sector companies rated by Moody’s Investors Service, 14 had negative outlooks for next year as of November, in sectors spanning from chemical to telecommunications, automobile and semiconductor. 

While this highlights the declining financial buffer in the companies, the primary culprit behind it is their aggressive investments that keep their leverage metrics elevated, Chris Park, associate managing director of Moody’s, told reporters at a press conference held in Seoul.

“Some of their aggressive investments will be maintained, which will hamper the improvement of their financial balance sheets,” Park said.

Leverages from across all sectors -- auto to retail, technology, steel, chemical, telecom and utilities -- will remain elevated after a steep increase in 2019, he added.

“Many of these companies after 2018 have carried out very aggressive investments as well as acquisitions. These range from battery makers, refiners, technology sector players and semiconductor makers.”

Such an investment binge is a double whammy for the companies, which are already exposed to the continued trade tensions between the United States and China, according to Park. In the meantime, the low interest rate environment will keep domestic funding conditions supportive for such corporates, which might on the other hand fuel debt-funded growth to undermine financial buffer.

Without the upside factors, such as robust rebound in the global economy or stronger-than-expected industry conditions, the industry will not be able to buck the trend, he also noted.

Yoo Kon, head of corporate finance group at Korea Investors Service, cited the worsening balance sheet of nonfinancial Korean firms starting 2017.

The EBITDA-to-sales ratio of some 24,400 Korean companies fell to 11.6 percent in the first half of 2019, from 14 percent a year prior, according to data by KIS, a Seoul-based subsidiary of Moody’s. On the other hand, the volume of the net leverage by firms in the first half of 2019 has risen 23.7 percent on-year to 324 trillion won.

“Companies are already actively investing, but how do they manage their investments especially when margins are narrowing?” Yoo said. “For those companies who have a large investment burden, their capability to control the financial risk is the most important factor as we rate those companies.”

By sectors, distribution, automobile, carrier, steel and display panel are expected to have a negative outlook for 2020, according to KIS.

The financial sector, however, was the exception.

Korean banking groups’ overseas M&As -- especially in Southeast Asian countries -- are unlikely to have a negative impact on their financial stability, provided the deals are relatively small in size, Moody’s Senior Credit Officer Sophia Lee said.

“Banks are getting more profitable market with a larger net interest margin,” Lee said.

“With a gradual increase in terms of expanding in the Southeast Asian market, we do not see this as a big risk. We believe the small-scale overseas M&A’s will be rather credit positive for the ratings of financial companies.”

Lee said the Korean banking system remains stable despite slower economic growth, as they were able to remain at “stable” ratings in terms of operating environment, asset risks, capital, funding and liquidity, profitability and efficiency, as well as government support, citing Moody’s data.

By Son Ji-hyoung (consnow@heraldcorp.com)

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