S&P: KCC Corp. 'BBB' Ratings Affirmed On Solid Operating Performance Despite Increased Equity Investments; Outlook Stable
"The rating affirmation reflects our expectation of KCC's solid operating performance over the next 12-24 months, given its strong market positions in the building materials and coating materials businesses and current favorable conditions in the domestic property market," said S&P Global Ratings credit analyst Jun Hong Park.
In our view, the current favorable conditions in the domestic property market may not be sustainable and the market is likely to gradually slowdown from late 2017. Still, we believe KCC's strong market positions in the building materials and coating materials businesses and its diversified customer bases that are exposed to sectors other than property are likely to sustain its stable profitability.
We believe the deterioration in KCC's credit quality in 2015 is likely to be temporary. The company made significant equity investments, especially the acquisition of Samsung C&T Corp. shares worth around Korean won (KRW) 700 billion. That reduced its cash balance and increased the debt level significantly, resulting in its adjusted debt-to-EBITDA ratio deteriorating to 3.5x in 2015, from 1.2x in 2014. Also, the one-off losses from KCC's subsidiary KCC E&C Co. Ltd. (KCC E&C) added to the deterioration in 2015 even though the improvement in the profits of KCC's building materials business continued.
We expect KCC's credit quality to improve over the next 12-24 months. Our base case assumes continued solid operating performances from the company's building materials and coating materials businesses, as seen from robust performances in the first half of 2016, and normalized performances at KCC E&C without significant one-off losses. Also, our base case doesn't assume any significant increase in equity investments and capital expenditures. Reflecting these, we expect KCC to restore its adjusted debt-to-EBITDA ratio to 2.5-3.0x in 2016-2017, commensurate with the rating.
"The stable outlook on KCC reflects our expectation that the company's strong and stable positions in the domestic paint and building materials markets will enable it to generate moderate free operating cash flows and not increase debt significantly over the next 24 months," said Mr. Park.
We may lower our rating on KCC if the company's adjusted debt-to-EBITDA ratio exceeds 3.5x on a sustained basis. This could happen as a result of slower progress in the company's disposal of equity investments, further aggressive equity investments, or weaker-than-expected profitability because of slowing demand from the construction, auto, or shipbuilding industries.
We may raise the rating if KCC's adjusted ratio of debt-to-EBITDA falls below 2x for a protracted period, potentially as a result of: (1) significant debt reduction using proceeds from disposals of non-core assets such as equity investments or property; and (2) no significant acquisition of non-core assets using the proceeds.