[Edaily Marketin KIM YEON-SEO Reporter] As the government accelerates the restructuring of the petrochemical industry by injecting more than 700 billion won in support, attention is focused on whether this will put the brakes on the industry’s declining credit ratings. Although unfavorable business conditions—such as oversupply originating from China—persist, forecasts suggest that the industry will be able to prevent further credit rating downgrades by improving its financial structure through debt reduction and capital expansion during the restructuring process.

According to the financial investment industry on the 28th, the government on the 22nd of this month gave final approval to the “Yeosu No. 1” petrochemical business restructuring plan submitted by four companies: Yeocheon NCC, Lotte Chemical, Hanwha Solutions, and DL Chemical. This marks the second petrochemical restructuring initiative following the “Daesan No. 1” project approved last February. Through this restructuring, the plan is to reduce ethylene production capacity by 1.39 million metric tons annually, establish an integrated corporation to alleviate oversupply, and shift the business structure toward high-value-added and eco-friendly products.

The core of the restructuring is the shutdown of Yeocheon NCC’s Naphtha Cracking Complex (NCC) Plant 2 (annual capacity of 920,000 metric tons) and Plant 3 (470,000 metric tons). Plant 1, which will remain in operation, will be integrated with Lotte Chemical’s Yeosu plant’s NCC and basic materials business to form a new corporation. Hanwha Solutions and DL Chemical will contribute their downstream (D/S) business divisions as in-kind capital, and Lotte Chemical, Hanwha Solutions, and DL Chemical are each expected to hold a 30% stake in the new entity.

The participating companies will pursue self-rescue measures totaling 800 billion won to facilitate the restructuring. Hanwha Solutions and DL Chemical plan to conduct a capital increase totaling 545 billion won to repay Yeocheon NCC’s existing debt. They will also make new investments totaling 253.2 billion won to transition to high-value-added products—such as medical-grade low-density polyethylene (LDPE) and polyolefin elastomers (POE)—and to build the necessary infrastructure.

The government will also provide a tailored support package worth over 700 billion won, including financial and tax measures as well as cost-cutting initiatives. KDB Industrial Bank will supply 450 billion won in new funds, and the Korea Trade Insurance Corporation will expand import insurance limits. Additionally, the support measures include duty-free treatment for naphtha and crude oil, as well as various tax breaks.

Petrochemical Industry Facing Concentrated Downgrades and Negative Outlooks

The credit market is closely watching whether this restructuring will be able to stem the decline in the petrochemical industry’s creditworthiness. Since last year, the petrochemical sector has been classified as a particularly vulnerable industry, facing

a concentrated wave of credit rating downgrades and negative outlooks

.

In the first half of this year, credit rating agencies’ regular reviews generally saw more credit rating upgrades than downgrades overall, but the petrochemical sector showed the exact opposite trend. A total of four companies in the petrochemical sector had their credit ratings or outlooks downgraded, marking the highest number of downgrades among all sectors. Even among companies that avoided direct rating adjustments, a significant number have a “negative” outlook, leaving open the possibility of further downgrades.

According to the credit rating industry, LG Chem’s credit rating was downgraded from “AA+ (Negative)” to “AA0 (Stable)” during the first-half periodic review. Yeocheon NCC was downgraded from “A- (Negative)” to “BBB+ (Stable),” and SK Advanced was downgraded from “BBB+ (Negative)” to “BBB (Stable).” Lotte Chemical also has a “Negative” outlook attached to its “AA-” credit rating.

The market is closely watching to see whether government-led restructuring and business restructuring will lead to a recovery in the creditworthiness of petrochemical companies. Based on a synthesis of the restructuring scenarios outlined by credit rating agencies, business consolidation among companies and capacity reductions centered on NCCs are expected to increase utilization rates and thereby improve profitability to some extent. If certain downstream facilities are also included in the restructuring, this could help alleviate supply pressures.

However, some analysts suggest that these measures have limitations in resolving the industry’s structural slump. This is because, amid continued global expansion of production capacity—particularly in China—and the commissioning of new low-cost facilities domestically, the industry is likely to face a double burden. While this restructuring is expected to be effective in reducing the scale of losses, analysts note that it will be difficult to fundamentally enhance cost competitiveness or resolve the structural competitive disadvantages faced by domestic companies.

Prioritizing Financial Restructuring Over Industry Recovery

Credit experts believe that while a structural improvement in

the industry outlook

is unlikely, the restructuring itself will be effective. This is because, as participating companies proceed with business adjustments, the establishment of joint ventures, and the transfer of business operations, some losses and borrowings can be excluded from the consolidated financial statements of existing shareholder companies.

While there is a possibility that the ultimate financial burden—such as market-based debt—will remain with the parent companies, it is assessed that a government support package, including capital injections and debt repayment, can offset the limited improvement in business performance. In particular, Yeocheon NCC’s debt repayment through a rights offering and new financial support from policy financial institutions are expected to serve as a buffer to reduce the short-term financial burden on participating companies and prevent further downgrades in their credit ratings.

Ultimately, this restructuring is expected to have a greater impact in terms of improving companies’ financial structures and defending their creditworthiness than in bringing about a full-fledged recovery in the petrochemical industry. While it is difficult to expect an improvement in operating performance due to global oversupply, analysts suggest that, backed by policy support, the companies can reduce debt and spread the burden of losses, thereby halting the ongoing trend of declining credit ratings for the time being.

Kim Sang-man, an analyst at Hana Securities, stated, “In conclusion, while there does not appear to be much room for improvement in the current operating performance outlook for petrochemical companies, they are expected to be able to defend against the trend of steadily declining credit ratings by benefiting from financial improvements during the restructuring process.” He added, “This is because, although the restructuring will involve some out-of-pocket costs, it should be viewed as a process carried out with the support of so-called subsidies.”