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Rating Action:

Moody's affirms LG Chem's A3 rating; outlook stable

 The document has been translated in other languages

08 Feb 2019

Hong Kong, February 08, 2019 -- Moody's Investors Service has affirmed the A3 issuer rating of LG Chem, Ltd.

The rating outlook remains stable.

This rating action is in response to the company's announcement on 30 January 2019 that it would substantially increase capital spending, mainly on its battery business.

RATINGS RATIONALE

"The rating affirmation reflects our expectation that LG Chem's credit quality will remain broadly stable and within the parameters of an A3 rating over the next 1-2 years, as its higher financial leverage, stemming from large investments in its battery business, will be largely offset by improving business diversity," says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer.

According to LG Chem, the company plans to increase its capital spending to KRW6.2 trillion in 2019 from KRW4.6 trillion in 2018.

Moody's notes that its capital spending started to increase substantially in 2018 and will remain elevated at least over 2019-21.

Such spending will be mainly used to increase its electric vehicle (EV) battery capacity to accommodate large order backlogs from global auto manufacturers and to build a new naphtha cracking center in Korea by mid-2021.

Given such investments and the sizable working capital deficits related to its battery business, Moody's expects LG Chem's reported debt to approximately double by year-end 2020 from KRW5.3 trillion at year-end 2018.

However, Moody's does not believe that the company will face difficulties in raising external funds, given its strong access to the banking and debt capital markets.

Consequently, despite a steady growth in EBITDA, mainly supported by incremental earnings in its battery business, Moody's expects LG Chem's adjusted debt/EBITDA to rise to around 1.9x in 2019 and 2.0x-2.2x in 2020. This level of financial leverage is significantly higher than the average level of around 1.1x over the last three years.

Nonetheless, Moody's believes that LG Chem's investments in EV batteries will materially improve its business diversity and overall competitive strengths, given the company's strong competitiveness in this business and good prospects for global EV battery demand.

According to LG Chem, the company has an EV battery order backlog of around KRW80 trillion as of year-end 2018 from various global auto manufacturers. In view of this situation and the acceleration in the sales of EVs globally -- against the backdrop of tightening environmental regulations and the improving economics of EVs -- Moody's expects revenue from its battery business to more than double by 2020 from KRW6.5 trillion in 2018.

LG Chem's profitability for the battery business should also improve meaningfully, given the benefits from economies of scale and improving pricing terms.

In this regard, Moody's estimates the EBITDA contribution from LG Chem's non-petrochemical business to increase to around 45% in 2020 from around 25% in 2018, which will reduce its exposure to the cyclical petrochemical business.

Moody's notes that there remain a degree of execution risk in its battery business, but that it would be largely manageable because of its good track record and technological capabilities.

LG Chem's operating income fell by 23% to KRW2.2 trillion in 2018 from its historical high of KRW2.9 trillion in 2017, mainly caused by softer product spreads in its core petrochemical business.

Reported debt increased to KRW5.3 trillion by year-end 2018 from KRW3.0 trillion at year-end 2017 because of sizable capital spending and working capital deficits. Consequently, adjusted debt/EBITDA increased to around 1.5x in 2018 from 0.8x in 2017.

The stable rating outlook reflects Moody's expectation that LG Chem will quickly increase revenues and improve profitability in its EV battery business, while maintaining stable operations in its petrochemical business over the next 1-2 years.

Moody's does not expect LG Chem's rating to be upgraded over the next 2-3 years, in view of its heavy capital spending program during this period.

Upward pressure on the rating could arise over the longer-term if the company meaningfully increases revenue and earnings in the EV battery business through establishing a strong global market position, while maintaining a robust financial profile, such that its adjusted debt/EBITDA remains below 1.0x-1.25x on a sustained basis.

LG Chem's rating could face downward pressure if (1) the company experiences major operating difficulties in its EV battery business or weaker-than-expected industry conditions for its petrochemical business; or (2) its adjusted debt/EBITDA exceeds 2.0x-2.25x for a prolonged period.

The principal methodology used in this rating was Chemical Industry published in January 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

LG Chem, Ltd. is a major Asian producer of a diverse mix of commodity and specialty chemicals, including olefins, polyolefins, ABS, engineering plastics, acrylate, plasticizers, synthetic rubbers, PVC and specialty polymers. The company is also a manufacturer of rechargeable batteries -- including electric vehicle (EV) batteries -- LCD panel materials and pharmaceutical products.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.

Wan Hee Yoo
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Chris Park
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

No Related Data.
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