Moody's Investors Service has changed to positive from stable the outlook for LG Electronics' (LGE) Baa3 issuer rating and senior unsecured rating.
The outlook change follows improvements in LGE’s credit profile and balance sheet, and which together better position the company against industry cyclicality.
"We expect LGE’s improved credit profile to prove sustainable over the next few years," says Ken Chan, a Moody's Vice President, adding, “Although the operating environment is expected to become more challenging – given the global economic slowdown and a potential LCD panel industry downturn over the next 12-18 months – LGE’s healthy balance sheet and the strong profitability in its handset division should establish a buffer against such volatility.”
"Moreover, the company has shown fundamental improvements in its operating profile and developed more stringent financial management policies," says Chan.
“It has successfully revamped its mobile communications division through better product designs and specifications as well as de-leveraged its balance sheet, so increasing its financial flexibility,” says Chan.
“In addition, its stronger level of recurrent cash flow mitigates liquidity pressures arising from the large capex required at the LG Display level and also reduces its reliance on external financing,” adds Chan.
Any rating upgrade will depend upon the company’s maintenance of its financial discipline and credit profile – against the backdrop of a difficult operating environment in the coming 12-18 months – such that its operating margin remains above 5% and total debt/capitalization below 40-45%. In addition, Moody’s expects the company to gradually lengthen its debt maturity profile.
On the other hand, the outlook will revert to stable if: 1) there is a more-than-expected severe downturn in the global economy or the LCD panels industry, thereby affecting profitability and balance sheet leverage, such that operating margin is below 3% and total debt/capitalization above 55%; or 2) LGE becomes aggressive in its investment policy.
LG Electronics Inc., headquartered in Seoul, the Republic of Korea, is a leading company in the global consumer electronics market.