RPT-Fitch Downgrades POSCO to 'BBB'; Outlook Stable
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Dec 23 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has downgraded South Korea-based steel producer POSCO's Long-Term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB' from 'BBB+'. The Outlook for the ratings is Stable. The agency has also downgraded POSCO's Short-Term IDR to 'F3' from 'F2'. The downgrade reflects POSCO's deteriorating credit metrics caused by elevated levels of debt and moderate profitability, and the expectation of significant investments in coming years. Fitch expects the company's FFO net leverage to exceed 3.5x in 2013 and 2014, above the agency's previous threshold of 3.5x where negative rating action would have been considered. The Stable Outlook reflects Fitch's expectation that POSCO's earnings will slowly recover after bottoming out.
KEY RATING DRIVERS
Moderate Profitability to Continue: Fitch does not expect to see significant improvements in POSCO's core steel margins as the steel industry continues to face severe over-capacity and a slow recovery in global demand. Fitch expects POSCO's margins for its non-steelmaking businesses (such as engineering and construction) to remain at healthy levels as they benefit from the company's expansion in steel manufacturing.
High Capex: 2013 capex is expected to be KRW8 trillion, up from KRW7.2 trillion in 2012. Fitch expects POSCO to spend at least KRW6 trillion over next two years in line with its plan for continuous expansion of its steel capacity. Credit Metrics Remain Weak: Fitch does not expect POSCO's net leverage to fall below 3.5x - a level consistent with a 'BBB+' rating level - until 2015.
Moderate profit margins and continuous sizable investment are likely to keep POSCO's debt level high and Fitch expects its net leverage to reach exceed 3.5x in 2013 and 2014.
Financial Assets Provide Buffer: POSCO possesses a large portfolio of equity investments, valued at approximately KRW4 trillion, part of which it can liquidate if needed.
Negative: future developments that may, individually or collectively, lead to negative rating actions include:
-Aggressive capex spending and significant acquisitions that may result in a higher debt position
-FFO adjusted net leverage exceeding 4.0x on a sustained basis
Positive: future developments that may, individually or collectively, lead to positive rating actions include:
-Substantial improvement in the steel industry via consolidation and easing raw material constraints
-FFO adjusted net leverage falling below 3.5x on a sustained basis
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