“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 ] LG Uplus(032640)has been steadily reducing its debt levels based on improved profitability and the generation of excess cash. However, as a large volume of debt has come due, short-term debt has increased by more than 25% over the past year. While the company’s financial stability is excellent, some observers suggest it is now time to restructure its debt portfolio to focus on long-term debt.

According to the financial investment industry on the 12th, LG Uplus will conduct a bookbuilding process on the 13th to issue 150 billion won in corporate bonds. The issuance is structured with 50 billion won in 2-year bonds and 100 billion won in 3-year bonds. Depending on the outcome of the bookbuilding, the company plans to increase the issuance amount to up to 300 billion won. NH INVESTMENT & SECURITIES and KB Securities are serving as the lead underwriters.

The market views LG Uplus’s solid market position and improved profitability favorably. At the same time, there is growing attention on the trend of its short-term debt ratio rising again.

Reducing Debt Through Cost Efficiency and Generating Free Cash Flow

LG Uplus’s consolidated revenue for the first half of this year was 7.4987 trillion won, a 1.2% decrease from 7.5925 trillion won in the same period last year. In contrast, operating profit rose 10.1% year-over-year to 616.7 billion won. Net income also increased by 3.7% to 393.7 billion won. The operating profit margin improved by 0.8 percentage points, from 7.4% to 8.2%.

Analysts attribute the improvement in profitability largely to cost-efficiency measures. LG Uplus’s operating profit margin had fallen from 6.9% in 2023 to 5.8% last year, driven by rising personnel expenses and depreciation costs in 2024, compounded by the inclusion of 150 billion won in voluntary retirement costs in the third quarter of last year.

This year, cost-saving effects from labor cost reductions resulting from the divestiture of low-profit businesses and restructuring are becoming apparent. Net inflows of subscribers through number portability following a personal data breach at a competitor also supported the company’s performance. The net inflow of subscribers from April of last year through January of this year totaled approximately 335,000.

Cash generation has also improved. Cash flow from operating activities in the first half of this year totaled 1.8625 trillion won, a 9.0% increase compared to the same period last year (1.7090 trillion won). During the same period, free cash flow (FCF) rose 9.6% from 737 billion won to 807.4 billion won. This was driven by the completion of 5G network investments, which has reduced the capital expenditure (CAPEX) burden starting in 2024, combined with increased operating cash inflows.

The excess cash was used to repay debt. Total debt decreased by 20.9% over two years, from 7.2886 trillion won at the end of the first half of 2024 to 5.7668 trillion won at the end of the first half of this year. Net debt also decreased by 26.4% over the same period, from 6.2406 trillion won to 4.5915 trillion won. The debt-to-equity ratio fell from 34.8% to 29.1%, dropping below the generally accepted optimal level of 30%. The net debt ratio also declined by 20.7 percentage points, from 70.3% to 49.5%.

Surge in Maturing Debt… Long-Term Refinancing Challenge

The issue lies in the

maturity

structure of the debt. While total debt decreased, short-term debt maturing within one year actually increased. At the end of the first half of this year, short-term debt (including current portion of long-term debt) stood at 1.9552 trillion won, a 25.4% increase from 1.5592 trillion won in the same period last year. Compared to the end of last year, the increase reached 39.4%.

This is not due to the company raising new short-term funds. Pure short-term debt amounts to only 26.2 billion won. Rather, it is the result of an increase in the amount of debt reclassified as current portion of long-term debt as the maturities of corporate bonds and long-term debt approached within one year. Current portion of long-term debt rose from 1.4022 trillion won at the end of last year to 1.9290 trillion won at the end of the first half of this year. During the same period, non-current corporate bonds and long-term borrowings decreased from 4.4683 trillion won to 3.8116 trillion won.

The proportion of short-term debt in total debt also rose to 33.9% at the end of the first half of this year. This represents a 7.3 percentage point increase from 26.6% in the same period last year. Compared to the end of last year (23.9%), it jumped by 10 percentage points (p) in just half a year. This marks a rebound in a ratio that had been steadily declining from 37.4% in the first half of 2024.

The burden is also significant when compared to cash on hand. Cash and cash equivalents at the end of the first half of this year stood at 1.1753 trillion won, a 33.4% increase from the same period last year. However, this amount amounts to only about 60% of short-term debt. In other words, the debt due within one year is 1.7 times the company’s cash on hand.

NICEHoldings also highlighted this issue. In its regular rating report last May, it analyzed that, as of the end of March, short-term borrowings (excluding lease liabilities) totaled 1.7623 trillion won, exceeding cash and cash equivalents (985.1 billion won).

LG Uplus is also moving to refinance its debt through long-term financing. In the first half of this year, the company raised 667.4 billion won in corporate bonds and 200 billion won in long-term borrowings to repay 1.005 trillion won in current long-term debt. There is speculation that this latest corporate bond issuance could also be used to refinance maturing debt with long-term financing.

The prospect of increased future funding needs is also cited as a reason for the need to extend the maturity of the debt structure. NICEHoldings forecasted that cash outflows would increase due to expanded shareholder returns and investments in the Paju AIDC (Artificial Intelligence Data Center). It is pointed out that if funding requirements grow while the proportion of short-term debt remains high, the company will be exposed to interest rate and market fluctuations more frequently at each refinancing point.

Park Kyung-min, a senior researcher at NICEHoldings Credit Rating, analyzed in a report, “Considering the level of cash and cash equivalents retained within the company and the scale of cash flow that can be generated in the short term, it is expected that refinancing of maturing debt will be necessary,” adding, “Given the company’s stable business foundation and excellent operating profitability, it should be able to smoothly refinance its debt with financial institutions.”

He added, “Despite the expansion of shareholder returns and the investment burden associated with the Paju IDC, the company will maintain a stable financial structure by meeting its funding needs based on its stable cash generation capacity.”