Hyundai Steel Co. Upgraded To #BBB# On Improved Competitive Position And Sound Pro Outlook Stable

Stocks and Financial Services Press Releases Thursday February 25, 2016 16:45
HONG KONG--25 Feb--Standard & Poor's

HONG KONG (Standard & Poor's) Feb. 25, 2016--Standard & Poor's RatingsServices said today that it had raised its long-term corporate credit ratingon Korea-based steelmaker Hyundai Steel Co. to 'BBB' from 'BBB-'. The outlookis stable. We also raised the long-term issue ratings on the company's seniorunsecured notes to 'BBB' from 'BBB-'.

"The upgrade reflects our expectation that Hyundai Steel will maintain itsmuch improved competitive position over the next two years, given thecompletion of its major investments in both the upstream and downstream steelsegments," said Standard & Poor's credit analyst Jun Hong Park.

The company has achieved good economies of scale and significantly enhancedits product portfolio over the past few years. It has done this by addingsignificant upstream steel capacities in 2010-2014, merging with downstreamsteel affiliates Hyundai Hysco Co. Ltd. in 2015, and acquiring a specialtysteel company Dongbu Specialty Steel in 2015.

Hyundai Steel faces prolonged challenging conditions in the global and Asiansteel industry because of persistent oversupply in the steel market and highcompetition among Asian steel mills. However, we expect the company tomaintain its stable and sound profitability, which will result in moreresilient operating and financial performances than its peers. This is becausewe believe the company will continue to benefit from solid captive steeldemand from Hyundai Motor Group (HMG) and growing premium products sales, suchas high-strength auto steels.

We expect Hyundai Steel to generate positive free operating cash flows andmodestly reduce its debt over the next two years, mainly due to a substantialdecline in capital investments. Under our base-case scenario, we estimate thatthe company will improve its debt-to-EBITDA ratio to 3.8x-4.3x over the nexttwo years, from about 4.5x in 2015. Based on the above factors, we raised thecompany's stand-alone credit profile (SACP) to 'bb' from 'bb-'.

The 'BBB' rating on Hyundai Steel is three notches higher than the SACP,reflecting our view of a high likelihood that the company will receiveextraordinary support from HMG, whose group credit profile we assess as 'a-'.We assess Hyundai Steel as a strategically important subsidiary of HMG group,

mainly reflecting its strong integration with the group's auto manufacturingbusiness.

"The stable outlook reflects our expectation that Hyundai Steel will modestlyimprove its financial strength and gradually reduce its debt over the next twoyears, mainly due to lower capital investments and stable operatingperformances," said Mr. Park. Still, we believe that the weakness in the

fundamental conditions for the steel industry will continue. And this willlikely temper the benefits to Hyundai Steel from increased capacity, astructural improvement in profitability due to acquisition of a highervalue-added unit, and lower raw material costs.

We could raise our ratings if Hyundai Steel substantially improves itsoperating performance with continued low capital expenditures and debtreductions, resulting in its debt-to-EBITDA ratio approaching 3.0x on asustained basis. Also, we could raise the ratings if the company's statuswithin the group strengthens significantly.

We may lower our ratings if Hyundai Steel's debt-to-EBITDA ratio moves closerto 5.0x on a sustained basis. This could potentially happen as a result ofweaker-than-expected operating performance due to lower selling prices andweak demand, especially for steel products related to construction andshipbuilding, or larger-than-anticipated capital investments. Also, we maylower the ratings if the company's status within the group weakenssignificantly.

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