[News Focus] Steel industry faces rising credit risk on low cash

Unlike Korea’s shipping and shipbuilding industries, the domestic steelmakers may not face immediate credit risks given that their problems have more to do with overcapacity in the market.

The government, therefore, put the steel industry on a different watch list last April, urging the companies to voluntarily and preemptively improve their finances by reducing costs associated with equipment and inventories to offset overcapacity. The financial regulator also suggested them to restructure via mergers and acquisitions. 

However, their latest audit filings show that steel companies are exposed to rising debt with low cash in hand, leading to market speculations that they could be next in line to go through creditor-led restructuring if they face risks of defaulting on their debt. The Financial Services Commission had indicated that it could enforce restructuring in steel and petrochemical firms after the shipping and shipbuilding companies.

Dongkuk Steel, for instance, has close to 3 trillion won ($2.6 billion) in current liabilities with assets of about 1.6 trillion won, including cash and cash equivalents of some 226 billion won, according to the company’s first quarter audit report. It needs to pay back 450 billion won to its bond investors by early next year. This means that even if it converts all of its current assets, Dongkuk will still not be able to meet its short-term debt obligations. Also, although it generated profit in the first quarter, the company is still facing difficulties to secure cash from its operations. Dongkuk bonds are graded BB.

Hyundai Steel, the country’s second biggest steelmaker of Hyundai Motor Group, has more than 5 trillion won in current liabilities, including about 1 trillion won the company needs to pay back to its bond investors. Its current assets stand around 5 trillion won with 617 billion in cash as of the end of March this year, according to its auditing filing.

However, market observers say that Hyundai Steel -- backed by Korea’s auto giants Hyundai Motor and Kia Motors -- is financially in a better position than Dongkuk as its bonds are graded AA and Hyundai Motor has abundant liquidity. The two automakers have a combined 24.14 percent stake in Hyundai Steel with group chairman Chung Mong-koo’s 11.81 percent stake in the steelmaker.

“Since steel, petrochemical and construction have been excluded from the list of companies (that include shipping and shipbuilding) sensitive to market downturns, they will not likely affect the credit market,” said Kim Ki-myung, credit analyst at Korea Investment & Securities.

“However, investor confidence will be affected by the ongoing restructuring.”

POSCO, Korea’s largest steelmaker, is not facing as much credit risk as Dongkuk or Hyundai Steel as it has enough current assets to convert them to cash to pay for its short-term obligations.

By Park Hyong-ki (hkp@heraldcorp.com)