POSCO E&C issued 400 billion KRW in private perpetual bonds on July 20, marking the company's first-ever issuance of such securities. The bonds carry a 6.35% coupon rate with a 3-year call option and were issued to repay existing debt and stabilize the company's maturity structure. The capital infusion lowers POSCO E&C's consolidated debt-to-equity ratio from 171.8% in Q1 to 152%, with further reduction to the 140% range expected after the company repays approximately 250 billion KRW in commercial paper maturing in September — bringing the ratio below the 150% downgrade trigger set by domestic credit rating agencies.
POSCO E&C Issues 400 Billion KRW Perpetual Bonds at 6.35% Coupon
According to Yonhap Infomax Stock Search (screen number 4210) on the 21st, POSCO E&C issued 400 billion KRW in private perpetual bonds on July 20. This is the first time POSCO E&C has issued perpetual bonds. The coupon rate is 6.35%, with an early redemption (call option) available after 3 years.
A POSCO E&C official stated, "The purpose is to suppress additional increases in total borrowings by using the funds to repay existing debt, and to stabilize the maturity structure. We plan to continuously secure liquidity through financial structure improvement, along with business performance recovery, working capital efficiency, and strengthened bond collection management."
Debt-to-Equity Ratio Drops to 152% After Bond Issuance
POSCO E&C's financial conditions are precarious from a credit rating perspective. All three domestic credit rating agencies have set "debt-to-equity ratio of 150% or higher" as one of the downgrade triggers. POSCO E&C's consolidated debt-to-equity ratio as of Q1 was 171.8%. With the 400 billion KRW capital infusion from the perpetual bonds, the debt-to-equity ratio dropped to 152%.
When the company repays approximately 250 billion KRW in commercial paper (CP) maturing in September, POSCO E&C's debt-to-equity ratio will fall to the 140% range. This brings the debt-to-equity ratio below the credit rating downgrade trigger. POSCO E&C's current credit rating is A+ (negative outlook).
Credit Rating Agencies Monitor Profitability Metrics Beyond Debt Ratio
While the perpetual bonds lower the debt-to-equity ratio, opinions exist that subsequent profitability improvements must support this. Beyond the debt-to-equity ratio, operating profit margin or EBIT (earnings before interest and taxes)/sales below certain levels are also presented as downgrade trigger conditions.
For example, NICE Credit Rating presented EBIT/sales of 4% or lower as one of the downgrade conditions. As of March, the company's EBIT/sales was 3.2%. Additionally, whether business competitiveness weakens due to administrative sanctions is also a major monitoring target for credit rating agencies.
A credit rating agency official stated, "One of the main rationales for assigning the rating when past performance was good was that the financial burden was relatively smaller compared to other construction companies. The burden has been increasing recently in that area, so we are focusing on (debt-to-equity ratio, etc.)." The official added, "The business environment has not improved either, so we will evaluate comprehensively considering profitability and other factors."
Interest Rate Step-Up Clause Raises Early Redemption Question
Whether POSCO E&C will proceed with early redemption of the perpetual bonds after 3 years is also worth watching. The perpetual bonds include a step-up clause, with interest rates rising incrementally. From July 2029 onward, 3.2% will be added to POSCO E&C's 3-year individual credit spread rate (5.13% as of the 16th). From July 2030, an additional 0.5% will be added to the rate.
If early redemption does not occur, the interest burden may increase, so credit rating agencies may monitor the redemption decision considering the debt-like characteristics of the perpetual bonds.
FAQ
What did POSCO E&C do on July 20?
POSCO E&C issued 400 billion KRW in private perpetual bonds on July 20, marking the company's first-ever issuance of such securities. The bonds carry a 6.35% coupon rate with a 3-year call option and were issued to repay existing debt.
Why did POSCO E&C issue perpetual bonds?
POSCO E&C issued the bonds to repay existing debt and lower its debt-to-equity ratio below the 150% downgrade trigger set by domestic credit rating agencies. The company's consolidated debt-to-equity ratio was 171.8% in Q1, and the bond issuance brought it down to 152%, with further reduction expected after September CP repayment.
How does the interest rate step-up clause work in POSCO E&C's perpetual bonds?
From July 2029 onward, the interest rate will be POSCO E&C's 3-year individual credit spread rate (5.13% as of the 16th) plus 3.2%. From July 2030, an additional 0.5% will be added annually. If early redemption does not occur after 3 years, the interest burden will increase.
