Fitch Ratings has affirmed Korea Ocean Business Corporation’s (KOBC) Long-Term Foreign-and Local-Currency Issuer Default Ratings at ‘AA-‘ with a Stable Outlook.
Fitch views KOBC as a government-related entity and uses a top-down rating approach. This reflects a special statute, KOBC’s close operational and administrative linkage to the government and our expectation of a high likelihood of exceptional government support for the entity, if required.
KEY RATING DRIVERS
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Status, Ownership and Control: ‘Very Strong’
KOBC is a special legal status entity with liability transfer implications based on the Korea Ocean Business Corporation Act (KOBC Act). The Korean government holds 53% of the entity and policy banks own 44%, effectively making KOBC state-owned. KOBC’s operations are highly regulated under various legal frameworks. The Minister of Oceans and Fisheries oversees its operations, including annual budgets, and the minister can determine detailed supervision of KOBC’s capital adequacy, asset quality, liquidity, and other matters deemed necessary to secure management robustness.
Support Track Record: ‘Very Strong’
Under the KOBC Act, the government can guarantee the payment of the principal and interest of borrowings and bonds issued by KOBC. The government can also cover losses if KOBC’s reserves are insufficient, which we view as a very strong support mechanism. The entity can use urgent loans from the Bank of Korea under the KOBC Act if it faces a temporary shortage of funds. Shipping companies benefit from paying tonnage tax scheme and part of the benefits are contributed to KOBC’s capital annually, with the entity expecting the amount to be about KRW40 billion in 2023.
Socio-Political Implications of Default: ‘Strong’
Korea’s trade is highly dependent on shipping, which accounted for more than 99% of shipments by weight. Trade also made up 70% of Korea’s GDP in 2021. A default by KOBC will jeopardise the government’s plan to rebuild the shipping industry as companies will have more difficulty securing liquidity and pay more for funds. We believe KOBC’s specialised mission to support the shipping industry leaves it without immediate substitutes, and its services will be disrupted in the short to medium term if it defaults.
Financial Implications of Default: ‘Very Strong’
KOBC is the only government-related entity (GRE) focused on supporting the shipping industry. A default will make investors more wary of investing or lending to the industry in the absence of credit guarantees or investments by the government. Our assessment also considers the contagion effect its default would have on other GREs in Korea that have similar backing from the government on debt repayment and capital replenishment. KOBC is a frequent issuer in the domestic debt market and we believe that the government has sufficient incentive to keep its access to debt markets.
Operating Performance
KOBC is likely to have posted an operating loss in 2022 due to a loss on the valuation of its financial instruments. We expect the company’s earnings to fluctuate with changes in the share price of Korea’s leading shipping line, HMM. KOBC owns shares as well as debt instruments issued by HMM that form a substantial portion of its portfolio.
However, earnings in 2022 excluding valuation of financial instruments are likely to have remained intact, given stable interest and fee revenues. We expect KOBC’s capital adequacy to remain healthy in 2023 as we do not expect any substantial increases in its risk-weighted assets.
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Derivation Summary
KOBC’s ratings reflect our assessment of government linkages and support incentives, resulting in a weighted score of 50 under our Government-Related Entities Rating Criteria. We adopt a top-down approach and equalise KOBC’s rating with those of Korea (AA-/Stable), without taking into account KOBC’s Standalone Credit Profile.
Liquidity and Debt Structure
KOBC’s debt stood at KRW3.3 trillion in 2021, and mainly comprised debt in the local capital market with long maturity (weighted average of life of 16.9 years at 9 March 2023). We expect KOBC to liquidate its financial investments in case of need. KOBC and Korea Development Bank continue to discuss selling stakes in HMM, and this can reduce KOBC’s debt if it materialises. Fitch expects KOBC’s debt to increase at a slower pace in 2023, even without a stake sale, because we do not expect significant additional investments in the sector.
Issuer Profile
KOBC carries out the government’s policy mission to support shipping companies’ liquidity and ship purchases, and to promote the competitiveness of Korea’s maritime transport industry.
RATING SENSITIVITIES
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 weaker incentive by the government to provide support.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
– Positive rating action on the sovereign, in conjunction with consistently strong linkages with the government and supportive regulations.
Source: Fitch Ratings
