Hong Kong, Sept. 8, 2008 — Standard & Poor's Ratings Services today raised its long-term corporate credit rating on Korea-based LG Electronics Inc. (LG Electronics) to 'BBB' from 'BBB-'. At the same time, Standard & Poor's raised its rating on the company's senior unsecured debt to 'BBB' from 'BBB-'. The outlook on the long-term corporate credit rating is stable.
The rating upgrades reflect the company’s stronger financial risk profile, based on improvements in its handset and LCD panel businesses, and a more diversified earnings stream. The company's debt-to-EBITDA ratio improved to 1.8x in 2007 from 3.5x in 2006 and the company started to generate positive free operating cash flow in 2007 following a reduction in LCD capital expenditures.
The company’s efforts to enhance its handset design capabilities and improve its cost efficiencies have contributed to market share and operating profitability gains, which we expected them to sustain. In addition, cyclical recovery in the global LCD panel market and the company’s good position in that industry contributed to the financial improvements in 2007. Despite a recent slowdown in the industry, the company’s good position in this growing market should provide long-term benefits. However, softening global IT demand could adversely affect the overall performance of the company. Notwithstanding this, Standard & Poor's believes that LG Electronics should be able to maintain its current financial risk profile over the medium term, reflecting its well-diversified revenue sources. The current weakness of the Korean won, in comparison with other major currencies, should also help the company’s profitability, at least in the short term.
The ratings on LG Electronics reflect the company's strong global market position over a broad range of consumer electronics products, home appliances, and mobile handsets. The company also benefits from improving brand power and product quality. These factors are offset by LG Electronics' high leverage, a relatively weak liquidity management policy, and ongoing cyclicality in the LCD panel business, although the company is expected to retain ample borrowing capacity.
The stable outlook reflects the expectation that the company will be able to maintain its current financial risk profile for at least the next 12 to 24 months. The outlook could be revised to negative if the company's debt-to-EBITDA ratio deteriorates to 2.5x, or if the company again records significant negative free operating cash flow.
Standard & Poor's is unlikely to revise the outlook on the long-term corporate credit rating on LG Electronics to positive over the short-to-medium term, given the slowing global economy and pricing pressures, which could adversely affect the demand for LG Electronics’ major products, and constrain further improvements in the company’s financial profile.
A Korean-language version of this media release is available via standardandpoors.co.kr or via Standard & Poor's CreditWire Korea on Bloomberg Professional at SPCK . Complete ratings information is available to subscribers of RatingsDirect, Standard & Poor's Web-based credit analysis system, at www.ratingsdirect.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com; under Credit Ratings in the left navigation bar, select Find a Rating, then Credit Ratings Search.
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