“Credit Checkpoint” is a column that assesses the credit rating risks of companies preparing to issue corporate bonds by examining their financial structure and cash flow. It evaluates a company’s short- and medium-term financial stability by focusing not only on the numbers in the financial statements but also on the quality and sustainability of its cash flow. We highlight key financial indicators and potential risk factors to help corporate bond investors and market participants assess a company’s creditworthiness from a more comprehensive perspective. <Editor’s Note>

[E-Daily Marketin Reporter LEE GEON-EOM ] GS Holdings is entering the public bond market backed by the solid credit support of its parent company, GS Global Corp.(001250). However, its cash-generating capacity has hit rock bottom, as a massive operating loss in the first quarter of this year was compounded by a net outflow in free cash flow (FCF). As the company’s own financial soundness has rapidly deteriorated due to funding massive capital expenditures (CAPEX) through debt, analysts say it is difficult to guarantee favorable financing conditions.

According to the financial investment industry on the 5th, GS Entec will conduct a bookbuilding process on the 8th for 35 billion won worth of unsecured corporate bonds. Since GS Entec found it difficult to raise funds based on its own creditworthiness, it received a full payment guarantee from its parent company, GS Global Corp., and was assigned an “A (Stable)” credit rating.

The market believes that, despite GS Global Corp.’s payment guarantee, it will not be easy to raise funds on favorable terms. With overall investor sentiment toward corporate bonds deteriorating and HANTECH LTD.’s cash flow having slowed significantly, observers predict that meeting investors’ expectations will be no easy task.

In fact, according to the Financial Supervisory Service’s electronic disclosure system, GS Entec’s free cash flow (FCF) for the first quarter of this year was negative (-) 47.4 billion won, marking a large net outflow. FCF refers to the actual available cash remaining after subtracting capital expenditures—such as capital investments—from the cash generated through operating activities. A negative FCF indicates that the cash generated from core business operations alone was insufficient to cover even capital investments, signifying a corresponding increase in the company’s reliance on external funding.

Operating cash flow (OCF), which reflects the results of the company’s core operating activities, also stood at -19.8 billion won, with the deficit more than sextupling compared to the same period last year (-3.0 billion won). This is the result of the company pushing ahead with large-scale capital investments to transition into the offshore wind substructure business, despite its internal cash-generating capacity having completely collapsed.

Behind GS Entec’s slowing cash flow lie a “drought in new orders” and an “earnings shock.” GS Entec’s first-quarter revenue plummeted 90.1% year-over-year to 3.6 billion won. As a result, the company posted an operating loss of 4.0 billion won, shifting to a deficit compared to the same period last year.

In the offshore wind substructure sector, the company has failed to secure any significant additional work since winning the Yeonggwang Nakwol project in 2023, and its order backlog has shrunk to 7.8 billion won as of the end of the first quarter of this year. Although its business scale has contracted, the burden of fixed costs—such as labor expenses and depreciation—remains unchanged, leading directly to deteriorating profitability.

As cash reserves dry up, the debt burden is swelling to unmanageable levels. It is estimated that even by pooling all available liquidity, the company would struggle to cover the increased debt.

In fact, GS Entec’s net debt (total debt minus cash and cash equivalents) as of the end of the first quarter stood at 272.6 billion won, a 20.8% increase from the end of the previous year (225.6 billion won). Although total debt decreased by 3.1% from 323.0 billion won at the end of last year to 312.9 billion won at the end of the first quarter of this year, the actual debt burden has increased because cash and cash equivalents plummeted by 58.7% during the same period, from 97.5 billion won to 40.3 billion won. The debt-to-asset ratio—the proportion of total assets accounted for by debt—stood at 57.6%, nearly double the appropriate level of 30%.

The problem is that GS Entec is facing large-scale long-term investments. This year alone, the company plans to spend 105.7 billion won on investments such as offshore wind turbine substructure facilities at its existing Yongjam plant, making the depletion of cash and cash equivalents and an increase in borrowing inevitable. While the repayment of principal and interest itself is unlikely to be a problem thanks to the parent company’s payment guarantee, observers note that, given the soaring financial burden, the company will likely have to pay higher-than-expected interest costs in the process of securing institutional investment.

Lee Eun-jeong, a senior researcher at Korea Credit Rating, stated, “The company’s revenue base has weakened due to delays in securing new orders following the offshore wind substructure project, and it posted an operating loss again in the first quarter.” She added, “Considering the planned additional capital expenditures related to offshore wind and the company’s weakened cash generation capacity, an increase in borrowing is expected to be inevitable.”