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Rating Action:

Moody's revises outlook on LG Chem to stable from negative; affirms Baa1 ratings

 The document has been translated in other languages

02 Nov 2020

Hong Kong, November 02, 2020 -- Moody's Investors Service has revised to stable from negative the outlook on LG Chem, Ltd.

At the same time, Moody's has affirmed the company's Baa1 issuer and senior unsecured ratings.

"The change in outlook to stable from negative reflects our expectation that LG Chem's earnings will increase significantly over 2020-21, mainly supported by better-than-expected petrochemical spreads and strong earnings growth in its battery business," says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer.

"We expect the company's financial leverage to improve over 2020-21 from the elevated levels in 2019, as stronger earnings will more than offset higher debt from heavy capital spending," adds Yoo.

RATINGS RATIONALE

LG Chem's Baa1 ratings primarily reflect the company's operating stability, supported by its solid market position in the Asian petrochemical market and improving business diversification thanks to its fast-growing battery business. These strengths are partly offset by the cyclical nature of the company's core businesses and its elevated capital spending.

LG Chem's adjusted debt/EBITDA should improve to 2.6x-2.7x in 2020-21 from about 3.3x in 2019, mainly driven by robust earnings growth. This level of financial leverage appropriately positions the company at the Baa1 ratings level.

Moody's expects LG Chem's adjusted EBITDA to increase to around KRW4.6 trillion in 2020 and KRW5.4 trillion in 2021 from KRW2.8 trillion in 2019, mainly because of (1) healthy earnings in its core petrochemical business, (2) strong sales growth and improving profitability in its battery business, and (3) the absence of one-off losses in its battery business during 2019.

Increased earnings in LG Chem's petrochemical business will in turn be supported by improved downstream product spreads due to higher demand for consumer electronics and packaging materials amid the coronavirus pandemic.

In addition, Moody's expects LG Chem's battery business to achieve a mid-single-digit operating margin in 2021 compared to negative 0.4% in 2019 (excluding one-off losses), because of improving economies of scale and operating efficiency. Moody's furthermore expects revenue from the battery business to more than double by 2021 from KRW8.35 trillion in 2019, mainly supported by robust demand for electric vehicle (EV) batteries.

On the other hand, despite asset sales, Moody's expects LG Chem's adjusted debt to increase to KRW14.0 trillion-KRW15.0 trillion by the end of 2021 from KRW9.4 trillion as of the end of 2019. The debt increase is mainly to fund large-scale investments and working capital deficits related to EV batteries as well as capital spending on a new naphtha cracking center. LG Chem plans to increase its EV battery capacity to 260 gigawatt hours (GWh) or more by the end of 2023 from around 120 GWh at the end of 2020.

LG Chem's liquidity sources are insufficient to meet its maturing debt and negative free cash flow over the next 12 months. However, the associated risks are offset by its strong access to the banking and debt capital markets.

On 30 October 2020, LG Chem's shareholders approved the demerger of its battery business into a separate wholly-owned subsidiary. The demerger itself will have no impact on LG Chem's capital structure, but can enhance its financial flexibility and capital structure through potential equity offerings of the newly created subsidiary.

The ratings also take into account the following environmental, social and governance (ESG) factors.

The company benefits from the global trend to reduce carbon emissions, which should support a material increase in revenue and earnings from its global market-leading EV battery business.

LG Chem is exposed to increasing environmental regulations and safety risks for its petrochemical business. These risks are somewhat mitigated by the company's track record of environmental compliance and established operational capabilities. In addition, LG Chem's battery business is exposed to risks associated with responsible production, as evidenced by the large provision expenses in 2019 attributed to energy storage system battery fires in Korea.

The ratings also consider the company's increasingly aggressive investment appetite as reflected by the sizable investments in its battery business, although from a very prudent level prior to 2018.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Moody's could upgrade the ratings if the company significantly increases its earnings while containing debt growth, such that adjusted debt/EBITDA remains below 2.25x on a sustained basis.

Moody's could downgrade LG Chem's ratings if financial leverage remains weak, such that adjusted debt/EBITDA exceeds 3.00x-3.25x for a prolonged period. Major challenges in its EV battery business could also be negative for the ratings.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, 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 EV batteries), advanced materials and pharmaceutical products.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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