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Rating Action:

Moody’s assigns first-time A2 IFSR to Construction Guarantee Cooperative; outlook stable

 The document has been translated in other languages

11 October 2019

Hong Kong , October 11, 2019 – Moody's Investors Service ("Moody's") has assigned an A2 insurance financial strength rating (IFSR) to Construction Guarantee Cooperative (CG).

The rating outlook is stable.

This is the first time that Moody's has assigned a rating to CG.

RATINGS RATIONALE

The A2 IFSR reflects CG's well-established franchise in its designated construction guarantee market in Korea, its strong capitalization relative to its risk taken, and low exposure to high-risk assets.

These strengths are offset by CG's high gross guarantee exposure to its shareholders' equity, and exposure to the cyclical guarantee business in the construction industry.

CG's capitalization is strong, because its equity base has increased consistently with stable retained earnings and new member contributions. Around 90% of equity is invested by its members, and its equity base has grown, registering KRW5.9 trillion as of end of December 2018 from KRW5.3 trillion in 2014. This is reflected in Moody's assessment of a very low gross underwriting leverage.

The cooperative maintains a highly conservative investment book, in accordance with its internal guidelines. Its bond portfolio consists mostly of treasury and bonds from high quality financial institutions. It also holds a large portion of its investments in bank deposits and money market funds.

CG holds a strong position in the construction guarantee market in Korea – by providing guarantees, insurance, and loans to its members – and commands a very high market share for this niche business.

Moody's also recognizes CG's close relationship with the Ministry of Land, Infrastructure and Transport (MOLIT), and its policy role of supporting the development and growth in the domestic construction sector. Moody's also points out that CG's operations and mandate are governed by the Framework Act on the Construction Industry. Consequently, while CG is not owned by the Government of Korea (Aa2 stable), Moody's assumes that the government would be willing to provide financial and operational support to the cooperative when needed.

On the other hand, the cooperative's credit profile could be negatively affected by unexpected and significant payment defaults resulting from adverse developments in the Korean economy, and a slowdown in its key construction sector. And a gradual decline of the government's social overhead capital (SOC) budget and a slower housing construction market could weaken the credit profiles of construction firms, and therefore elevate the guarantee claims paid by CG.

Moody's points out that the recent revision to the government's SOC budget to boost the domestic economy would partially offset the pressure given more than two-thirds of the construction projects that CG provides guarantees on are public projects.

In addition, Moody's views CG's guarantee exposure relative to its shareholders' equity as high, and is somewhat vulnerable to member-specific shocks.

RATING DRIVERS

Moody's would consider upgrading the rating if: (1) there is a sustainable and material improvement in CG's profitability; and/or (2) the cooperative shows greater business diversification in terms of business lines, industry sectors, or geographies, while maintaining its capitalization and profitability.

On the other hand, the rating could be downgraded if: (1) there is a deterioration in capital strength, such that its exposure to guarantee risks as a proportion of equity increases materially; (2) there is a volatile and substantial weakening in its profitability, such that the company consistently records net losses; and/or (3) there is a deterioration in the close relationship with MOLIT and, therefore, lower willingness by the government to provide support.

The principal methodology used in these ratings was Property and Casualty Insurers published in May 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Construction Guarantee Cooperative mainly provides guarantee, loan, and liability insurance services to its members in Korea. At the end of 2018, the cooperative's total assets and shareholders' equity stood at KRW6.9 trillion and KRW5.9 trillion, respectively.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Young Kim
Analyst
Financial Institutions 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

Sally Yim, CFA
Associate Managing Director
Financial Institutions 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

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