Moody's Investors Service has revised to negative from stable the outlook for Hyundai Steel Company's Baa3 issuer and senior unsecured bond ratings.

Mr Chris Park VP & Senior Credit Officer at Moody's said that "The negative outlook mainly reflects the increasing likelihood that Hyundai Steel's financial profile will remain weak for its Ba2 standalone rating over the next 12 to 18 months, given its higher than expected financial leverage, year to date, and the ongoing challenges surrounding the Asian steel industry. This revision in outlook also factors in its aggressive capacity expansion plan to accelerate the construction of its third blast furnace project."

Hyundai Steel's adjusted debt EBITDA is anticipated to rise to about 4.5 times in 2011, above the previous forecast of about 4 times. This is a combined result of lower profitability and higher debt stemming from its elevated CAPEX levels.

And while leverage should improve on higher sales of specialty auto sheets to Hyundai Motor group and working capital surplus, due to lower input costs, Moody's considers Hyundai Steel's ability to reduce leverage to 4 times or below in 2012 as constrained by softening in demand in the region, as well as the accelerated CAPEX needs for the third blast furnace project.

Moody's also considers the latter as a credit negative development, given the weakness in market conditions. Moody's envisages adjusted debt EBITDA as staying slightly above 4 times in 2012 and EBIT interest at about 4 times. These are weak for the Ba2 standalone rating.

The Baa3 rating continues to factor in a two notch uplift, based on the high willingness and financial capability of the Hyundai Motor Group to provide financial support, in the event of need. This assumption is supported by Hyundai Steel's increased importance in the group's value chain as its key hot rolled coil supplier, as well as the group's large scale and strong financial capacity, all of which are reflected in Hyundai Motor's Baa2 rating.

The rating outlook could revert to stable if the company can improve its financial profile by enhancing earnings and prudently managing its growth strategy, such that adjusted debt EBITDA falls below 4 times and EBIT interest stays above 3.5 times to 4 times.

The rating could undergo a downgrade if Hyundai Steel's overall financial profile deteriorates and remains weak because of its aggressive expansion strategy, and or a significant slowdown in sales and earnings, such that adjusted debt EBITDA stays above 4 times to 4.5 times and EBIT interest stays below 3.5 times.