Domestic Recession and China Competition Hit Hard... Credit Rating Downgrade Raises Concerns of a Second Homeplus [Why&Next]

Homeplus Files for Corporate Rehabilitation After Credit Downgrade
Slump in Domestic Demand and Intensified Competition with China Deepen Struggles in Distribution, Construction, and Chemical Sectors
Concerns Grow Over Continued Credit Rating Downgrades and the Emergence of Another "Homeplus" This Year

Credit rating downgrades by credit rating agencies played a decisive role in Homeplus's application for corporate rehabilitation (court receivership), and it has been revealed that more than 35 major domestic companies experienced credit rating downgrades from last year through February of this year. Credit rating downgrades continued in the distribution and construction industries, which are struggling due to sluggish domestic demand caused by the economic downturn, as well as in the chemical industry, which is suffering from intensified competition with China.

Credit Downgrades Continue in Distribution, Construction, and Chemical Industries Due to Domestic Demand Slump and Intensified Competition with China

According to related industries on the 10th, Korea Credit Rating, NICE Credit Rating, and Korea Investors Service, the three major domestic credit rating agencies, downgraded the credit ratings of 35 companies (excluding duplicates) last year. Korea Investors Service downgraded 19 companies, Korea Credit Rating 17, and NICE Credit Rating 10 companies. This year, Homeplus's credit rating was downgraded, and as the credit rating outlooks for EcoPro, EcoPro BM, LG Chem, and Korea Zinc have also been lowered, the likelihood of continued credit rating downgrades is high.

The companies whose credit ratings fell shared common factors such as a decline in domestic retail sales, a slump in the real estate market, and intensified competition with China, according to the rating agencies. Major domestic distribution companies such as Homeplus, E-Mart, and Lotte Hi-Mart, whose credit ratings were downgraded by all three major rating agencies, are representative examples. They are facing significant difficulties as their performance has sharply declined due to consumer recession and intensified competition among distribution channels.

Korea Credit Rating analyzed, "The retail sales index, a gauge of the domestic economy, has recorded the longest period of decline since 2022, indicating a continued consumption slump," adding, "High inflation, debt repayment burdens, and concerns over economic downturn have weakened household consumption sentiment recovery, leading to continued sluggishness in the distribution industry." NICE Credit Rating also evaluated, "Due to the economic slowdown and intensified competition between online and offline channels, credit rating downgrades of retail distribution companies with deteriorated financial stability were prominent."

Due to the domestic real estate market slump caused by weak domestic demand, credit rating downgrades were also seen in large construction companies such as GS Construction and Shinsegae Construction. The construction industry is in very poor condition, with bankruptcies continuing among mid-sized and small construction firms. This year alone, Shin Dong-A Construction (ranked 58th in construction capability), Daejeo Construction (103rd), Sambu Construction (71st), Angang Construction (138th), and Daewoo Shipbuilding & Marine Engineering Construction (83rd) have applied for court receivership. Rating agencies expect that it will take time for the overall housing market to recover and foresee continued credit pressure on domestic construction companies this year.

Concerns Over Continued Credit Rating Downgrades This Year

Credit rating downgrades also continued in the petrochemical industry, which is suffering from poor performance due to oversupply caused by large-scale capacity expansions by Chinese competitors. Credit ratings of Yeochun NCC, Hanwha Total Energies, and Hyosung Chemical were downgraded. Korea Credit Rating pointed out, "The oversupply situation caused by China's production capacity expansion is prolonged, and with limited demand recovery compared to supply increases, supply-demand improvement is unlikely," adding, "As operating income is expected to continue declining, business restructuring and financial risk mitigation through restructuring are essential to alleviate downward pressure on credit ratings."

Competition with China and the global slump in electric vehicle sales have cast a shadow over the secondary battery business as well. On the 4th, global credit rating agency Standard & Poor's (S&P) shocked the market by downgrading the credit ratings of LG Chem and LG Energy Solution. NICE Credit Rating also lowered the credit rating outlooks for EcoPro and EcoPro BM last month. The agency forecasted, "Due to the unfavorable industry transition, the overall poor operating performance of the EcoPro group is expected to continue."

As credit rating downgrades continue in key industries such as distribution, construction, and chemicals, the market views that a second Homeplus incident could occur at any time. When credit ratings are downgraded, financing difficulties increase, which can rapidly worsen already poor financial conditions.

Kim Dong-hyuk, a senior expert at Korea Investors Service's Evaluation Standards Office, observed, "Considering the domestic demand slump, worsening global trade conditions, expanded financial market uncertainties, and potential risks in real estate project financing (PF), the trend of credit rating downgrades is likely to continue this year as it did last year," adding, "Credit downward pressure will persist in industries with unfavorable business environments such as construction, petrochemicals, and secondary batteries, as well as in the secondary financial sector exposed to real estate PF risks."

Park Sang-hyun, a senior expert at iM Securities, pointed out, "The prolonged domestic demand slump has dealt a direct blow to the construction and consumption markets," adding, "With the Homeplus incident and construction company bankruptcies continuing, credit risks across the domestic industry have increased."