POSCO E&C Faces Imminent Business Suspension by Year-End; Credit Rating Downgrade Looms

Shinansan Line Accident: Administrative Sanctions Review by Year-End
Business Suspension of Up to Eight Months Possible
Credit Agencies Warn: "A Factor That Could Weaken Competitiveness in Winning Contracts"
Debt-to-Equity Ratio at 173.1%... Meets Downgrade Review Thresholds

The Ministry of Land, Infrastructure and Transport is expected to hold an administrative hearing next week on possible sanctions against POSCO E&C, the contractor involved in the tunnel collapse at Section 5-2 of the Shinansan Line. Until now, expectations had largely been that the process would be completed by the end of the year, but the government is moving faster. With a business suspension of up to eight months being considered, pressure for a credit rating downgrade is also mounting.

According to the Ministry of Land, Infrastructure and Transport on Oct. 23, it plans to hold an administrative hearing this month on the tunnel collapse at Section 5-2 of the Shinansan Line involving POSCO E&C. Two rounds of deliberations have been completed so far. The ministry aims to announce its decision by the end of the year, following a third round of deliberations after the hearing.

Credit rating agencies are closely monitoring the possibility that a business suspension, if imposed, could weaken POSCO E&C's competitiveness in winning contracts. "If new orders decline significantly after administrative sanctions, that could affect performance after a time lag and be reflected in the credit rating," said Lee Hyuk-jun, an executive director at NICE Investors Service. "POSCO E&C's profitability improved in the first half of this year, but its cash flow remains negative, leaving it to borrow externally to cover its funding shortfall." He added, "How much the company can restore its brand image, damaged by safety accidents, and turn its cash flow positive will be important variables."

An official at Korea Investors Service also said, "We are treating the possibility of a business suspension becoming a reality as a significant factor," adding, "If it has a meaningful impact on the company's business or finances, we may reflect it in the credit rating."

In June, credit rating agencies assigned POSCO E&C's unsecured bonds a rating of A+ (Negative), citing the company's progress in improving its financial structure and the possibility of weak new orders resulting from diminished business competitiveness as key factors under review. A credit rating measures a company's ability to repay its debt. A downgrade can make it harder to raise funds and increase borrowing costs.

Even if a business suspension is imposed, the company may face no immediate restrictions on bidding for new projects if it obtains a stay of enforcement and suspends the measure's effect through administrative litigation. However, damage to its brand value can weaken its competitiveness in securing contracts over the long term.

POSCO E&C has secured a cumulative KRW 4.4565 trillion in urban redevelopment and reconstruction projects this year, but it has made little headway in key areas of the Hangang Belt. It lost the bid for Shinbanpo Complex 19 to Samsung C&T. Its major contract wins were concentrated in Gyeonggi Province and areas outside the Hangang Belt, including Gwangmyeong Haan Jugong Complexes 3 and 4 (KRW 1.5604 trillion) and the area around Yeokchon Station in Eunpyeong-gu (KRW 587.4 billion). Analysts say that declining trust following a series of serious industrial accidents has contributed to the company's weak performance in the Hangang Belt, where brand competitiveness can sway residents' votes. In this situation, if a business suspension is imposed, it could also hamper POSCO E&C's bids for Mokdong New Town Complexes 2, 4, 11 and 14, which the company has identified as target projects.

The deterioration of its financial structure is also adding to pressure for a credit rating downgrade. The company's key financial indicators have already met the downgrade review thresholds set by all three credit rating agencies. Its consolidated operating profit for the first half of this year came to KRW 97.4 billion, turning a profit, but cash flow from operating activities recorded a net outflow of KRW 106.4 billion. This means that more cash went out than came in through operating activities, reducing the company's cash balance. Its consolidated debt-to-equity ratio stood at 173.1% at the end of the first half, exceeding the 150% threshold set by the three agencies. Its net debt-to-EBITDA ratio also rose from 1.6 times in the first quarter to 3.4 times in the first half, well above the 1.5-times downgrade threshold set by Korea Ratings. The ratio of EBIT to revenue was also 2.8%, meeting NICE Investors Service's threshold of 4% or lower.

POSCO E&C says it plans to improve its financial structure by raising capital through the issuance of hybrid securities and restoring operating performance. "We issued hybrid securities to curb the increase in borrowings and stabilize our debt maturity profile," a POSCO E&C official said. "We will secure liquidity by improving working capital efficiency and strengthening receivables management, while gradually improving key financial indicators, including our debt-to-equity ratio."

This content was produced with the assistance of AI translation services.