Fitch downgrades LG Electronics to 'BBB-'; outlook stable

March 11 Mon Mar 11, 2013 2:44am EDT

March 11 (Reuters) - (The following statement was released by the rating agency) SEOUL/SYDNEY/HONG KONG, March 11 (Fitch) Fitch Ratings has downgraded South Korea-based LG Electronics Inc.'s (LGE) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) and senior unsecured ratings to 'BBB-' from 'BBB'. The Outlook is Stable. Key Rating Drivers The downgrade reflects LGE's continued weak operating margins and thin free cash flow (FCF) generation that are not commensurate with a 'BBB' rating despite its improved operating result in 2012. Fitch expects FCF to stay weak due to intense price competition and heavy investment needed to develop new products. This will restrict the company's ability to deleverage. The Stable Outlook reflects Fitch's view that continued recovery in smartphone competitiveness as well as a solid appliance business will enable LGE to maintain credit metrics commensurate with the lowest investment grade. LG Display Inc., (LGD) a key subsidiary, is also likely to continue margin recovery due to the company's strong product mix and limited industry-wide capacity growth in 2013. However, LGE's margins are likely to fall in the LCD TV segment, as happened during H212 as competition intensifies and demand remains weak due to frail economic conditions. In addition, depreciation of the Japanese yen will strengthen Japanese TV makers' price competitiveness which may force LGE to reduce prices to maintain its market position. Fitch forecasts that recovery in LGE's smartphone margins and market share will be slow but steady, despite improvement in quality and brand recognition. This is because competition is becoming increasingly fierce among second-tier manufacturers as they attempt to close the technological gap with first-tier manufacturers. Fitch expects the industry will remain dominated by Samsung Electronics Inc. (A+/Stable) and Apple Inc. at least in the short-to medium-term, making it difficult for LGE to improve its market share significantly. LGE reported an EBIT margin of 2.2% (2011: 0.7%) while LGD returned to profitability with an EBIT margin of 3.1% in 2012. LGE's total adjusted debt/operating EBITDAR improved to 2.1x at end-2012 from 4x at end-2011. However, FCF margin was marginally positive in 2012. In its analysis, Fitch proportionally consolidates LGE's two major operating subsidiaries, LG Display and LG Innotek. Rating Sensitivities Negative: Future developments that may, individually or collectively, lead to negative rating action include - An increase in total adjusted debt/operating EBITDAR to over 3x on a sustained basis - EBIT margin falling below 1% on a sustained basis Positive: Future developments that may, individually or collectively, lead to a revision of the Outlook to Stable include - A decline in total adjusted debt/operating EBITDAR to below 2x on a sustained basis - An increase in EBIT margin to above 3.5% on a sustained basis

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