MOODY'S CONFIRMS Ba1 SENIOR DEBT RATINGS OF SAMSUNG ELECTRONICS
Frankfurt, 04-02-98 -- Moody's Investors Service confirmed its Ba1 ratings for long term debt of Samsung Electronics and guaranteed subsidiaries. The rating confirmation was prompted by Moody's announcement that Korea's sovereign rating was confirmed at Ba1. Samsung Electronics' solid cash flows from a strong export business combined with stringent cost saving measures and cutbacks in capital investments should provide the free cash flows necessary to meet rising debt service requirements. The company's operating challenges in a fiercely competitive semiconductor industry continue, while management is attempting to raise the export share of its electronics businesses. Samsung Electronics' rating for short term debt was confirmed at Not-Prime. Moody's outlook for the ratings is stable.
The ratings for the following securities were confirmed at Ba1:
Samsung Electronics Co. Ltd. – notes, eurobonds and convertible eurobonds,
Samsung Electronics America, Inc. – guaranteed euronotes,
Lower Colorado River Authority -- guaranteed pollution control revenue bonds,
AST Research, Inc. – senior guaranteed notes, and
Pan Pacific Industrial Investments PLC –zero coupon notes, supported by Samsung Electronics.
The Not-Prime ratings of the following issuers were also confirmed:
Samsung Electronics America, Inc. - for guaranteed commercial paper, and
Samsung Electronics Holding GmbH – for guaranteed commercial paper.
Over the years, Samsung Electronics has built a sound export business in the global semiconductor and electronics industries. The 57% export share of the parent company, however, only tells part of the story, because business volumes of the unconsolidated foreign subsidiaries have to be added to assess the size of the company's international cash flows. A large part of this growth was financed with foreign currency debt. If raised by subsidiaries, this debt is usually guaranteed by Samsung Electronics creating a contingent liability. Following the drastic devaluation of the Korean Won, the company now benefits from this currency-matched financing strategy. While the leverage of the Samsung Electronics group remains high,
rising hard currency cash flows should provide the financial flexibility for debt service.
Samsung Electronics' core business, memory-type semiconductors, remains under severe price pressure as a result of a precarious overcapacity situation. The company is driving the technology trend towards new chip generations and benefits from high production volumes and a comparatively low cost base, particularly following the Won devaluation. However, current cutbacks in investments may jeopardize the company's technological leadership. We expect Samsung Electronics to focus its cost savings on processes and purchasing rather than research and development.
The Korean electronics market is shrinking. While consumer electronics demand is mature for some time already, the fast growth in telephone equipment and terminals, particular for cellular telephony, has abated drastically as a result of sagging consumer confidence and rising unemployment. Samsung Electronics will have to compensate through export growth and the company is well positioned to achieve this, with an established international brand name and a broad and advanced product range. However, the global markets for consumer electronics are very competitive already and the expected export offensive of South East Asian suppliers will likely add to the margin pressure.
Samsung Electronics is a key company of the Samsung chaebol. Political and shareholder pressure as well as the tight financial situation in Korea is expected to lead to further corporate restructuring, especially of the large chaebols. This may involve disposals of non-core businesses, financial restructurings and changes in corporate governance. Because of its good growth potential and global presence, Moody's would expect Samsung Electronics to remain a flagship company for the Samsung chaebol, with access to all the intra-group support offered in the past. Contingent liabilities from financial guarantees for chaebol companies have been declining. None of the guarantees has been called so far and any financial impact on Samsung Electronics from support for Samsung companies should remain limited.
Samsung Electronics Co., Ltd., headquartered in Seoul, Republic of Korea, is an international manufacturer of semiconductors, consumer electronics, and other electronic products with revenues of approximately US$ 13 billion in 1997
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