(The following statement was released by the rating agency)
Dec 07 -
-- We expect GS E&C's financial risk profile to deteriorate due to
profitability erosion in its overseas businesses and the prolonged downturn in
the property development market in Korea.
-- We lowered our long-term rating on GS E&C to 'BBB-' from 'BBB'.
-- The outlook is negative, reflecting the heightened likelihood of the
company having to take over guaranteed debts for property developers amid an
increasingly difficult refinancing environment.
On Dec. 7, 2012, Standard & Poor's Ratings Services lowered its long-term
corporate credit rating on GS Engineering & Construction Co. Ltd. (GS E&C) to
'BBB-' from 'BBB'. The outlook on the rating is negative.
The downgrade of GS E&C reflects Standard & Poor's view that profitability
erosion from overseas plant construction and the prolonged downturn in Korea's
property development market will weaken the company's financial risk profile
over the next 12 to 18 months. We expect the company's debt to EBITDA ratio to
rise to over 5x in 2012 under our base-case scenario. We have lowered the
company's financial risk profile to "significant," while its business risk
profile remains "satisfactory."
In our view, the company's aggressive expansion into overseas markets and
heightened competition in domestic and overseas engineering, procurement, and
construction markets is likely to dilute its gross margin to around 9% over
the next 12 months, compared with 11.5% in 2011. The lower EBITDA and
continuous burden on working capital will likely limit GS E&C's capacity to
deleverage and improve its financial risk profile, in our view.
Furthermore, a large balance of payment guarantee that GS E&C extended to
small property developers-worth Korean won (KRW) 2.2 trillion as of the end of
September 2012--remains a negative factor for its credit quality. The
activation of such a guarantee could pressure the company's liquidity and its
debt profile if developers fail to pay the interest and principal they owe to
creditors and GS E&C is obligated to take over or repay such debt.
Our base-case scenario is predicated on modest growth in revenue of between 3%
and 7% in 2012 and 2013 due to lower new orders in the last 12 months.
However, the gross margin in the plant and civil engineering businesses, in
our view, will deteriorate close to 10% and 3%, respectively, in 2012 and
2013. We expect the company's ratio of adjusted debt to EBITDA to rise above
5x in 2012 and gradually fall back toward 4x in 2013 assuming that the company
will utilize its cash holdings rather than increase debt for its operations.
We assess GS E&C's liquidity to be "adequate," as defined in our criteria. We
estimate that the company's sources of liquidity to uses of liquidity will
exceed 1.2x over the next year. The company will have KRW1.6 trillion in
liquidity, comprising cash, funds from operations, and committed revolving
credit facilities. We estimate the company will need about KRW1.3 trillion to
cover debt maturities due in the next year as well as a shortfall in working
capital, planned capital spending, and dividends. We incorporate into our
assessment of the company's liquidity an expectation that the company will
need extra funds as a buffer against volatility in working capital and
The negative outlook reflects our view that GS E&C may need to take over the
guaranteed debt of property developers amid an increasingly difficult
refinancing environment for small developers and prolonged weak property
market in Korea, which would negatively affect the company's financial risk
We may lower the ratings on GS E&C if the activation of payment guarantees or
weaker-than-expected operating performance from overseas plant construction
further weakens its financial profile. The ratings on GS E&C could also come
under downward pressure if the company's cash flow deteriorates further or
adjusted debt to EBITDA stays above 4x over the next 12 to 18 months.
We may revise the outlook to stable if the company's debt to EBITDA stabilizes
below 4x on a sustained basis. This would require the company to reduce its
debt through stable operating performance or by disposing of noncore assets
and to reduce its exposure to developers' project finance debt.
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
GS Engineering & Construction Corp.
Corporate Credit Rating BBB-/Negative/-- BBB/Stable/--