01/12/2022

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LG Energy Solution, Ltd. — Moody’s upgrades LG Chem to A3; outlook stable

Rating Action: Moody’s upgrades LG Chem to A3; outlook stableGlobal Credit Research – 15 Feb 2022Hong Kong, February 15, 2022 — Moody’s Investors Service has upgraded LG Chem, Ltd.’s issuer and senior unsecured ratings to A3 from Baa1.At the same time, Moody’s has upgraded to A3 from Baa1 the senior unsecured ratings on LG Energy Solution, Ltd.’s (LGES, a battery subsidiary of LG Chem) notes that are jointly and severally liable by LG Chem.The outlooks on LG Chem and LGES have been changed to stable from positive.”The upgrade of LG Chem’s ratings reflects the large proceeds raised from LGES’ initial public offering (IPO) in January 2022 [1], which will allow LG Chem to maintain sound financial metrics and a significant financial buffer over the next couple of years, despite its sizable capital spending,” says Wan Hee Yoo, a Moody’s Vice President and Senior Credit Officer.”The rating action also reflects our expectation that LG Chem’s large investments will lead to greater business diversification, in particular given the high revenue visibility in its fast-growing battery business,” adds Yoo.RATINGS RATIONALEIn January 2022, LG Chem raised about KRW12.7 trillion (net proceeds of about KRW10.1 trillion at LGES through an issuance of new shares, and about KRW2.6 trillion at LG Chem through a sale of existing shares) at the consolidated level through LGES’ IPO.The net proceeds, which account for about 86% of LG Chem’s reported consolidated debt as of the end of 2021, will enable the company to contain its debt growth at a manageable level, despite its ambitious capital spending and working capital deficits over the next few years mainly to expand its electric vehicle (EV) battery capacity. In 2022 alone, the company plans to invest about KRW10.4 trillion, mainly in its battery, petrochemical and advanced materials businesses.As such, Moody’s expects LG Chem’s adjusted debt/EBITDA to remain sound at around 2.2x over the next 1-2 years, largely similar to the 1.9x estimated for 2021. Moody’s estimates LG Chem’s adjusted debt/EBITDA improved to 1.9x in 2021 from 2.5x in 2020 as a significant earnings improvement more than offset an increase in debt.This level of financial leverage is consistent with the company’s A3 ratings, particularly considering its strong financial buffer.This projection is also based on an expectation that LG Chem’s adjusted EBITDA will remain robust at around KRW7.0 trillion–KRW8.0 trillion annually over 2022-23, largely similar to the record-high KRW7.9 trillion in 2021 and significantly higher than the levels before 2021. This forecast is driven by Moody’s expectation that incremental earnings at LG Chem’s battery business will offset a moderation in profitability at its petrochemical business.LG Chem’s large cash holdings and robust earnings will also provide an adequate buffer against its exposure to product quality-related risks at its battery business.Moody’s also expects the company’s large investments in various business lines will further reduce the volatility of its core businesses, through strengthening its market positions and improving its business diversification into the fast-growing battery business.The ratings also consider the following environmental, social and governance (ESG) factors.LG Chem is exposed to increasing environmental regulations and safety risks at its petrochemical business. Its battery business is exposed to risks associated with responsible production, as evidenced by the ongoing large provision expenses since 2019 attributed to battery fires.However, the company benefits from the global carbon reduction trend, which should support a material increase in revenue and earnings from its global market-leading EV battery business.While the ratings also consider the company’s increasingly aggressive investment appetite, this risk is mitigated by its reasonably prudent financial policy, as evidenced by its ongoing non-debt funding activities.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody’s expectation that LG Chem will maintain sound financial metrics over the next 1-2 years, underpinned by its large cash buffers.Moody’s could upgrade LG Chem’s ratings if (1) the company grows its battery business strongly without material product quality issues, while maintaining adequate profitability; (2) its adjusted debt/EBITDA remains below 1.5x on a sustained basis through contained debt increases; and (3) the company maintains good liquidity.Moody’s could downgrade LG Chem’s ratings if the company’s financial leverage remains weak, such that its adjusted debt/EBITDA exceeds 2.5x on a sustained basis. Any evidence of significant operational problems at its battery business could also be negative for the rating.The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.LG Chem, Ltd. is a major Asian producer of a diverse mix of commodity and specialty chemicals, including olefins, polyolefins, ABS, engineering plastics, acrylate, plasticizers, synthetic rubbers, PVC and specialty polymers. The company is also engaged in the advanced materials and pharmaceutical businesses. LG Chem owns 81.8% of LG Energy Solution, Ltd., which is the leader in the global electric vehicle battery industry.REGULATORY DISCLOSURESFor further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Moody’s considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody’s. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entities are participating and the rated entities or their agent(s) generally provide Moody’s with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody’s Policy for Designating Non-Participating Rated Entities.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the UK and is endorsed by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody’s office that issued the credit rating is available on www.moodys.com.REFERENCES/CITATIONS[1] LGES’ regulatory filing 21-Jan-2022Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Wan Hee Yoo VP – Senior Credit Officer Corporate Finance Group Moody’s Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) 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