Moody's: Korean corporate credit quality to stay stable, but retail and steel sectors face challenges

Moody's Investors Service says that most Moody's-rated non-financial corporates in Korea (Aa2 stable) -- excluding unlisted government-related issuers -- will see their leverage levels stay stable or improve over the next 12 months, despite the continued macroeconomic challenges that they face.

Moody's explains that the stable or improved leverage will be driven by the companies' austerity efforts, as well as improved earnings from the levels seen in 2015.

"The credit profiles of companies in the refining, chemical, telecommunications and auto sectors will remain generally robust or stable over the next 12 months, owing to robust earnings and/or sizable free cash flow generation," says Wan Hee Yoo, a Moody's Vice President and Senior Analyst.

The analysis reflects Moody's expectations of soft but steady global and domestic economic growth, broadly stable oil prices and exchange rates, and supportive financial markets.

Moody's conclusions are contained in its just-released report titled "Non-Financial Companies -- South Korea: Credit Quality to Remain Stable, but Retail and Steel Sectors Face Challenges".

On the retail and steel sectors, Moody's says that the adjusted debt/EBITDA of many companies in these two industries will remain elevated or deteriorate further over the next 12 months, mainly owing to their weak earnings. The operating profit of retailers, for instance, will likely fall moderately when compared with the depressed levels seen in 2015, because of continued weak consumer spending, as well as intense competition from other retail formats.

Meanwhile, the persistent overcapacity in the steel sector and increasing trade frictions with importing countries should hinder the ability of companies in this industry to improve their financial profiles, and will keep their leverage levels elevated.

Moody's report points out that about a quarter (27%) of all Moody's-rated private-sector Korean non-financial companies carry negative-leaning outlooks, exceeding the 18% with positive outlooks. This suggests that negative rating actions will likely outnumber positive actions over the next 12 months. The negative outlook for many companies reflects their challenging industry conditions and/or company-specific factors.