Fitch Assigns Korea Ocean Business Corporation’s First-Time ‘AA-‘ IDR; Outlook Stable
Fitch Ratings has assigned Korea Ocean Business Corporation’s (KOBC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘AA-‘. The Outlook is Stable. The government-owned KOBC was established in 2018 under the Korea Ocean Business Corporation Act (KOBC Act). Its policy mission is to support shippers’ liquidity and ship purchase, and to bolster South Korea’s (AA-/Stable) maritime industry competitiveness.
Fitch deems KOBC a government-related entity (GRE) and uses a top-down rating approach, based on our expectations of a high likelihood of exceptional government support for the company, if required.
KEY RATING DRIVERS
‘Very Strong’ Status, Ownership and Control: KOBC is a special legal status entity whose liabilities may be transferred to the state under the KOBC Act. The Korean government holds 53% of KOBC’s shares and policy banks hold 45%. The Ministry of Oceans and Fisheries (MOF) oversees KOBC’s operations, including supervising the annual budget and major decisions to ensure compliance with the Act on the Management of Public Institutions. The Financial Services Commission can also supervise the company, if necessary.
‘Very Strong’ Support Record: KOBC has received consistent support, such as capital injections and subsidies. Capital is sourced from the government under the KOBC Act, and the company expects to receive an additional capital injection of KRW30 billion in 2021. The government may guarantee the redemption of the principal and interest of KOBC-issued bonds. In addition, the company’s deficit will be subsidised by the government if KOBC does not have sufficient reserves, according to the KOBC Act.
‘Strong’ Socio-Political Implications of Default: We believe that it would be difficult to find substitutes for KOBC in the short to medium term, if it should fail, because of the company’s specialised business focus, compared to other public entities. The shipping industry is important to Korea’s economy and geopolitics. KOBC was established amid diminishing competitiveness of the shipping industry, and the company had extended support of around KRW5 trillion to 80 companies as of end-2020.
‘Very Strong’ Financial Implications of Default: Fitch believes KOBC is a proxy funding agency of the government, borrowing in light of the tight spread (10bp) versus the five-year Korea treasury bond. Therefore, Fitch opines that a KOBC default would disrupt the sovereign and GREs market access and make investors and financial institutions hesitant to invest to the South Korean public sector.
The potential spillover effects of a default weighs more heavily on our assessment of KOBC’s financial implications of default than the company’s borrowing size. This is because a KOBC default would significantly affect the funding access and borrowing costs of other major Korean GREs with similar credit enhancement (deficit offset and potential debt repayment guarantee).
Steady Capital Adequacy: Capital adequacy remained stable, with the adjusted risk-based capital ratio at 503% in 2Q20 – well above the regulatory requirement of 100%. KOBC expects the ratio to have been above 300% by end-2020. KOBC’s asset quality improved, with the non-performing loan (NPL) ratio falling to 1.2% by end-2Q20 from 3.1% at end-2019. Its NPL coverage ratio was 185% at end-2Q20, compared with 85% at end-2019. KOBC reported a net gain on financial assets at fair value in 1H20 of KRW247 billion.
This led to an operating profit after provision of KRW296 billion, against a loss in 2019. The gain in fair value of its financial assets was due to the convertible bonds and bonds with warrants of HMM. Interest income rose by 90% yoy to KRW54 billion in 1H20 due to an expansion of its portfolio of financial instruments and loans. Return on assets and return on equity were high at 11.6% and 5.5%, respectively in 1H20, although these will fluctuate with the fair value of its financial assets.
KOBC’s ratings are equalised with Korea’s ratings, reflecting the assessment of the four factors under Fitch’s Government-Related Entities Rating Criteria, which result in a weighted score of 50.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Positive rating action for the sovereign, in conjunction with consistent strong linkages with the government and supportive regulations, would lead to positive rating action on KOBC.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A sovereign downgrade, significant changes leading to weakened linkages with the government or languishing incentive to provide support may lead to negative rating action.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of ‘3’. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Sovereigns, Public Finance and Infrastructure issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of three notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from ‘AAA’ to ‘D’. Best- and worst-case scenario credit ratings are based on historical performance.
Source: Fitch Ratings