“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 figures 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>

[Edaily Marketin Reporter LEE GEON-EOM ] KCC Corporation(002380)is returning to the public corporate bond market. Earlier this year, when monetary policy was relatively stable, the company raised more than five times the target amount. Market attention is now focused on whether it can maintain that momentum this time around. However, the prevailing view is that it is difficult to guarantee results similar to those seen at the beginning of the year, given that profitability indicators for its core business are on a clear downward trend and investor sentiment toward corporate bonds has frozen.

Credit Rating Unchanged, but Uncertainty Grows

According to the financial investment industry on the 22nd, KCC Corporation will conduct a bookbuilding process on the 23rd to issue a total of 200 billion won in unsecured corporate bonds. This bond issuance consists of 80 billion won in 2-year bonds and 120 billion won in 3-year bonds. Depending on the results of the bookbuilding, the total amount raised could increase to as much as 400 billion won. KCC Corporation’s unsecured corporate bonds carry a credit rating of “AA- (Stable).”

The market views KCC Corporation’s slowing profitability as a potential negative factor for this fundraising effort. KCC Corporation’s first-quarter revenue this year was 1.6263 trillion won, up 1.7% from 1.5993 trillion won in the same period last year. In contrast, operating profit totaled only 88.1 billion won, down 14.8% from 103.4 billion won during the same period last year.

Looking at the details, the silicon division saw the sharpest decline. First-quarter operating profit for the silicon division was 2.6 billion won, a sharp 87.6% drop from 20.6 billion won in the same period last year. Operating profit for the coatings division also fell by 18.1% to 45.8 billion won. In contrast, only the building materials division saw an increase, rising 14% to 27.1 billion won from 23.7 billion won in the same period last year.

As a result, cash flow has also shown a clear slowdown. KCC Corporation’s cash flow from operating activities for the first quarter of this year was 85.1 billion won, down 21.9% from 109.1 billion won in the same period last year. Free cash flow (FCF), calculated by subtracting capital expenditures from cash flow from operating activities (OCF), recorded a deficit of minus (-) 9.8 billion won.

FCF refers to the net cash a company holds after deducting various investment costs from the cash generated through operating activities. The fact that this indicator has turned negative means the company spent more cash on capital expenditures and other investments than it earned through its core business, suggesting that it must rely on external borrowing to cover the shortfall, which inevitably increases its financial burden.

Gradual Increase in Debt Burden

While cash generation slowed, debt levels rose. Total debt at the end of the first quarter of this year stood at 5.4374 trillion won, an 8.5% increase from 5.0107 trillion won at the end of the previous year. This was the result of simultaneous increases in liquid corporate bonds and short-term borrowings. Net debt, excluding cash and cash equivalents, also rose to 3.968 trillion won, a 4% increase from 3.8171 trillion won during the same period. Consequently, the debt-to-equity ratio rose to 30.9%, up 1.1 percentage points (p) from 29.8% at the end of the previous year. This figure exceeds the 30% threshold that credit rating agencies consider an appropriate level.

Market conditions are also unfavorable. This is because investor sentiment toward corporate bonds has significantly cooled due to interest rate hikes and the shift of funds toward the stock market. In the first half of this year, the issuance volume of domestic corporate bonds (public and private placements combined) totaled 46.6594 trillion won, a 17.4% decrease compared to the same period last year (56.4950 trillion won). Net issuance—calculated by subtracting redemptions from total issuance—recorded a negative (-) 4.9287 trillion won. This means that companies repaid more than they raised in new funds.

Yang Da-eun, an analyst at Korea Credit Rating, noted, “While the construction materials and coatings sectors are generating solid profits based on their oligopolistic market positions, the silicon sector’s performance has deteriorated due to slowing demand for high-value-added products.” She added, “Key factors to monitor for future creditworthiness include trends in the silicon market driven by global economic and supply-demand conditions, changes in demand from major Chonbang industries, and price trends for raw materials such as silicon metal.”

Meanwhile, KCC Corporation had previously conducted a bookbuilding process on January 26 with a target of raising 200 billion won. At that time, buy orders totaling 420 billion won and 675 billion won poured in for the 2-year and 3-year bonds, respectively, which were intended to raise 50 billion won and 150 billion won. The total order volume reached 1.095 trillion won, more than five times the target amount. The spread over the individual market average closed at -2 basis points for the 2-year bond and -3 basis points for the 3-year bond.