Politics is blamed for POSCO`s credit rating cut

Korea Ratings downgraded POSCO`s credit rating by one notch from AAA to AA+. It is the first time for a domestic credit rating agency to cut POSCO`s rating below top notch in 20 years since 1994. Korea Investors Service and Nice Investors Service also lowered POSCO`s credit rating outlook from "stable" to "negative," implying a possible credit rating downgrade in the future.

International credit rating agencies appraise POSCO seven to eight notches below Korean counterparts. Moody`s Investors Service rates the company at Baa2, Standard & Poor`s BBB+ and Fitch Ratings BBB. Perhaps Korea`s credit rating agencies have been giving better scores at POSCO, but Korea Ratings` latest decision still has significant meaning.

As for the reason of downgrade, Korea Ratings said POSCO`s profitability declined due to slowing steel market and intensifying competition due to oversupply. Korea Investors Service said it downgraded the company`s rating outlook due to uncertainty in financial stability recovery. POSCO made large-scale investments causing an increase in fiscal burden but the creation of investment effects was delayed, the credit rating agency explained.

One of the reasons POSCO failed to deal with changing market conditions is "personnel appointment risk," or influence from the political sector. POSCO is a privatized company but has been regarded as trophy to election whenever new government set in. Key political powers intervened in nomination of POSCO`s chairman. In the former Lee Myung-bak administration, officials coming from specific regions hustled around POSCO. Rumors spread that the company lacked vault cash to buy coal, the raw material for steel. Amid sagging key businesses, POSCO increased its affiliates to 46 companies through M&As. It is no surprise why POSCO had its own international competitive edge be flawed.

Rumors in the financial industry are that KT, which was also privatized, will experience a credit rating downgrade soon. KT is also stained with preferential personnel appointments. Many CEOs were ousted as they tried to impress the political sector instead of focusing on business. Credit rating downgrade results in a rise in companies` fund raising costs, and in turn an increase in their financial risk.

Fortunately, the Park Geun-hye administration is distancing from these two companies. POSCO nominated internally-promoted Kwon Oh-joon as its head and KT appointed IT expert Hwang Chang-kyu to lead the company. However, this is only a small step at best. Blocking political sector`s influence is necessary for both companies to regain status as Korea`s flagship companies.