LG Chem Ltd. Outlook Revised To Negative On High Investments And Rising Debt; 'A-' Rating Affirmed

  • We believe LG Chem's financial policy has become aggressive with sizable investments planned to expand electric vehicle (EV) battery and petrochemical plant capacities.
  • The volatile petrochemical market should limit increase in earnings from the energy solutions (batteries) business over the next two to three years.
  • On March 14, 2019, S&P Global Ratings revised its rating outlook on LG Chem Ltd. to negative from stable. At the same time, we affirmed our 'A-' long-term issuer credit rating on the Korea-based petrochemical producer.
  • The negative outlook reflects our view that LG Chem's heightened capex and rising debt have narrowed the headroom for the rating over the next 24 months.
HONG KONG (S&P Global Ratings) March 14, 2019--S&P Global Ratings today took 
the rating actions listed above. We revised the outlook on LG Chem to reflect 
our view of the company's aggressive financial policy amid volatile 
petrochemical market conditions. 

LG Chem's capital expenditure (capex) plan of about Korean won (KRW) 6 
trillion for 2019 is well beyond our expectation and the historical range of 
KRW1 trillion–KRW2.5 trillion (in 2011-2017). The spending is part of LG 
Chem's commitment to increase its battery capacity to about 100 gigawatt (GW) 
by end-2020 from 35GW as of end-2018. Furthermore, the company plans to 
complete expansion of petrochemical capacity by 800 thousand tons (ethylene) 
in Yeosu, Korea, in 2021. LG Chem's 2018 capex was 21% higher than the initial 
guidance at KRW4.6 trillion. 

We expect LG Chem's annual operating cash flow to be KRW3.5 trillion–KRW4.0 
trillion over the next two years, insufficient to cover the capex and 
dividends, in our view. As a result, we estimate the company's debt to rise to 
about KRW6 trillion by end-2019, from KRW3.6 trillion at the end of 2018 and 
KRW1.1 trillion as of Dec. 31, 2017. We also expect LG Chem's debt-to-EBITDA 
ratio to deteriorate to 1.5x–1.8x over the next two years, compared with about 
1.0x for 2018 and 0.3x for 2017.

LG Chem's petrochemical spreads are likely to be under downward pressure due 
to slowing demand and a sharp drop in crude oil prices in the fourth quarter 
of 2018. Nevertheless, the company's basic materials division (petrochemicals) 
should remain relatively resilient to the expected downcycle in the 
petrochemicals industry. This is because of LG Chem's solid market position as 
one of the leading petrochemical producers of Asia, with a diversified product 
portfolio and good operational efficiency.

In our view, earnings growth from the energy solutions business will support 
and drive LG Chem's overall earnings. However, profitability of the EV battery 
business is uncertain due to intensifying competition and risk of oversupply.

The negative outlook on LG Chem reflects our view that the company's 
heightened capex and rising debt have narrowed the headroom for the rating 
over the next 24 months.

We may lower the rating if LG Chem's ratio of debt to EBITDA stays above 1.5x 
on a sustained basis. Such a scenario could result from consistently high 
debt-financed capex or a significant deterioration in operating cash flows due 
to weaker petrochemical margins or slower ramp-up of the batteries business.

We may revise the outlook to stable if LG Chem's debt-to-EBITDA ratio remains 
below 1.5x on a sustained basis. This could result from the company lowering 
capital investments, thereby enhancing flexibility in managing debt. Stronger 
earnings growth stemming from better petrochemical margins and EV battery 
operations could also lead to robust operating cash flows, resulting in 
reduced leverage.
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