Hyundai Heavy’s Earnings Shock May Lead to Major Rating Downgrade of All Shipbuilders

According to financial investment sources, major credit rating firms are ready to review the ratings of shipbuilders after Hyundai Heavy Industries, the world’s No. 1 shipbuilder, reported that it took an operating loss of 1,103.7 billion won for the second quarter.(image:Sarah Tzinieris/flickr)

SEOUL, Aug. 8 (Korea Bizwire) – Across-the-board downgrading of the credit ratings of Korean shipbuilders is likely. Since the 2008 global financial crisis, major Korean shipbuilding firms have invested heavily in offshore plants and took on a huge amount of orders in FPSO (floating production storage and offloading) and other related areas as a way to overcome the severe downturn. But it turns out their efforts weren’t successful, leading only to low profitability and large debts.

According to financial investment sources on August 6, major credit rating firms are ready to review the ratings of shipbuilders after Hyundai Heavy Industries, the world’s No. 1 shipbuilder, reported that it took an operating loss of 1,103.7 billion won for the second quarter. The main reason for the unexpectedly high quarterly operating loss had to do with a 500-billion-won allowance for bad debts that may arise from its offshore plant projects.

After Hyundai’s announcement, all three major credit rating firms said they would adjust the ratings on the company downward or put it under review. In particular, Korea Ratings said it would review the ratings of the whole shipbuilding firms. Some analysts even suggested that the review may be as thoroughgoing as the one last year on the construction industry when GS Engineering & Construction put out a large loss.

Lim Jeong-min, Woori Investment & Securities analyst, said, “If and when Hyundai Heavy Industries goes through a credit rating adjustment, it may be possible that its subsidiaries such as Hyundai Mipo Dockyard and Hyundai Samho Heavy Industries would be subject to the same fate.

In addition, other industrial sectors such as oil refining and petrochemical industries may go through a review.” The current credit ratings of major shipbuilders are AA+, AA, and AA- for Hyundai Heavy Industries, Samsung Heavy Industries, and Daewoo Shipbuilding & Marine Engineering.

Hana-Daetoo Securities analyst Kim Sang-man also commented, “The new ratings will take into account the current state of the shipbuilders’ offshore plant projects, profitability outlook, new order prospect, and the like.”

By Sean Chung (schung10@koreabizwire.com)