November 29, 2024

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A view of downtown Seoul (Yonhap)

SEJONG -- Market insiders are raising the possibility that dozens of local businesses will suffer a downgrade in their credit standings next year in the wake of economic slowdown as well as worsening liquidity in their financial statements among many in the corporate sector.

Their prediction is based on the situation that three major credit rating agencies have recently increased the number of watch list for potential downgrades.

According to the lists held by Korea Investors Service, Korea Ratings and Nice Investors Service as of Friday, each firm has included 10 to 20 businesses in the candidate list for downgrade of their corporate bonds and commercial paper.

The agencies commonly distinguish the list of businesses, whose ratings will possibly be changed for a short-term period (within six months) from those for a long-term period (within one or two years).

Nice Investors Service have recently included several units of Lotte Group in the list for feasible downgrades.

Its measure came after Lotte Chemical publicized its plan to take over Iljin Materials in October. Nice Investors Service cast worries over financial burden, involving investment costs, and included some units -- such as Lotte holdings, Lotte rental and Lotte Capital -- as the list for downgrades.

HDC Hyundai Development and HDC holdings have been included in the watch list by both Korea Investors Service and Korea Ratings, following the collapse incident at the construction site of HDC Hyundai Development in Gwangju earlier this year.

Ratings agencies generally complete their assessment on corporate bonds by June and commercial paper by December each year. Accordingly, ratings for businesses, which are conducted in the first half, are based upon the financial statements in the previous year.

This signals possibly en masse downgrades in the first half of 2023, given the climbing number of candidates in 2022, market insiders say.

According to SK Securities, the ratio in the number of businesses, whose ratings were upgraded, to the number of business, whose credit standings were downgraded, stayed at 0.91 in 2022. This indicates that the latter outnumbered those with ratings ungraded.

An SK Securities research was quoted by a news outlet, as saying that “(the extent of) pressure for downgrades will be higher in 2023, as corporate earnings and soundness are forecast to worsen.”

By Kim Yon-se (kys@heraldcorp.com)