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Announcement:

Moody's revises GS E&C's Baa3 outlook to negative

Global Credit Research - 05 Oct 2010

Hong Kong, October 05, 2010 -- Moody's Investors Service has revised to negative from stable the outlook for its Baa3 issuer rating on GS Engineering & Construction Co., Ltd. ("GS E&C").

"The negative outlook reflects primarily an increase in GS E&C's vulnerability due to the apparent weakening Korean housing market, a situation exacerbated by the company's substantial payment guarantees to property developers," writes Chris Park, Moody's Vice President/Senior Analyst.

Moody's expects that the current slump in Korea's housing market will persist over the next 1-2 years, which will further weaken the solvency of housing projects for which GS E&C has provided hefty payment guarantees (amounting to KRW3.6 trillion as of June 2010) on behalf of property developers. This in turn will heighten the risk of a portion of the guarantees being called given the property developers' weak financial profiles. Such concern is partially mitigated by its sizeable liquidity holdings of KRW1.4 trillion as of June 2010.

The depressed home transaction volume also exposes GS E&C to the risk of delayed payments from buyers, which could delay an improvement in the company's working capital consumptions. Moreover, the inevitable decline in the profit contribution from its housing business -- which accounts for about 50% of the company's consolidated EBITDA -- represents a near-term challenge.

On the other hand, Moody's notes mitigating factors such as GS E&C's manageable level of unsold housing inventory; its improved access to the financial markets and property funds given its strong brand equity. and its strong order backlog on hand, which will support its profitability. Moody's also expects the company's payment guarantees would decline to less than KRW3 trillion by end-2010, upon the completion of housing projects for which sales have been satisfactory.

The outlook could return to stable if GS E&C can (1) maintain stable operating cash flow by decreasing its housing-related working capital volatility and (2) cut back its project guarantee balance to a manageable level. This could be evidenced by adjusted debt/EBITDA falling below 3-3.5x and OCF/adjusted debt rising above 20-25% on a sustained basis.

The rating could be downgraded if the company's liquidity position weakens materially or its operating cash flow deteriorates substantially, evidenced by adjusted debt/EBITDA above 3.5-4x or OCF/adjusted debt below 15-20%. Downward pressure also may arise if the company's payment guarantees to property developers remains at an elevated level for a prolonged period.

Moody's last rating action on GS E&C was on 17 December 2009, when the Baa3 rating outlook was revised to stable from negative.

The principal methodology used in rating GS E&C was Moody's Rating Methodology for Global Construction Industry, published in October 2007. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

GS E&C is one of the leading construction companies in Korea, providing engineering and construction services for housing, plant, civil engineering, and general building segments.

Hong Kong
Chris Park
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
JOURNALISTS: (852) 3758 -1350
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Hong Kong
Gary Lau
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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SUBSCRIBERS: (852) 3551-3077

Moody's Investors Service Hong Kong Ltd.
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Moody's revises GS E&C's Baa3 outlook to negative
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