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LG Chem Additional Discussion Report: Industry, Group Constraints and Rating Defense

LG Chem Additional Discussion Report: Industry, Group Constraints and Rating Defense

1. Purpose and Treatment

This report is a supplementary note that organizes the discussion on the factors weighing on LG Chem's performance, its relationship with LGES, and its rating defense posture, in light of the existing issuer_summary. It does not directly adopt the claims made in the discussion as newly confirmed facts. Confirmed figures and analytical points in the existing reports take precedence, and items requiring further confirmation are treated as unverified.

The conclusion is that LG Chem's weakness cannot be explained solely by industry factors or solely by company-specific factors. The structural downturn in Petrochemicals and the EV-cycle dependence of battery materials are industry-wide headwinds. At the same time, LG Chem's large consolidated exposure to LGES, North American battery investments, ESS ramp-up, subsidy dependence, increase in short-term debt, and the use of capital policy measures including LGES share sales to defend credit quality are specific to LG Chem's portfolio and financial management.

Therefore, LG Chem is not simply a company caught up in an industry downturn. At the same time, it is not a company whose deterioration is driven only by company-specific failures. From a credit perspective, it is necessary to track the bottoming-out of the industry cycle separately from LG Chem's own execution on structural adjustment and deleveraging.

2. Discussion Takeaway

The existing LG Chem report treats LG Chem not as a simple petrochemical company, but as a lower investment-grade industrial credit that has Chemicals, Advanced Materials, and Life Sciences at the parent-company level, and a large consolidated battery subsidiary in LGES. This starting point is appropriate. Of LG Chem's consolidated revenue of KRW12.247 trillion in 1Q 2026, LGES revenue accounted for KRW6.555 trillion. LGES therefore cannot be excluded when assessing consolidated earnings, debt, investment burden, and ratings.

At the same time, the current discussion confirmed the need to separate the downside factors more carefully. For Petrochemicals, industry factors are significant: capacity additions in China, oversupply in Asia, and the declining competitiveness of naphtha-based assets. Advanced Materials is heavily affected by the industry cycle, including EV demand, battery material prices, and customer inventory adjustments. However, the fact that LG Chem owns around 80% of LGES, absorbs battery investment and losses on a consolidated basis, uses LGES share sales as a tool for financial improvement, and is seeing increases in short-term debt and total debt represents a credit constraint specific to LG Chem.

The company's outlook for LG Chem should be read less as a strong recovery phase and more as a structural adjustment phase in which the company is testing for a bottom. Petrochemicals has shown improvement including one-off factors, Advanced Materials is expected to return to profit, and LGES has growth potential in ESS and cylindrical batteries. However, as of 1Q 2026, LG Chem reported a consolidated operating loss, a net loss, and an increase in short-term debt. Rating maintenance will therefore require not only earnings recovery, but also capex restraint, asset sales, the use of LGES share-sale proceeds, and improvement in consolidated leverage.

3. Industry Factors vs LG Chem-Specific Factors

In LG Chem's credit analysis, the downside factors should be separated as follows.

Issue Main nature Implication for LG Chem
Oversupply in Korean and Asian petrochemicals, Chinese capacity additions, and declining competitiveness of naphtha-based assets Industry factor Difficult for LG Chem alone to resolve. Requires restructuring of low-return assets and a shift toward higher-value products
Temporary return to profit in Petrochemicals Industry factor and company response 1Q 2026 included inventory valuation effects and tariff refunds, so this should not be viewed as structural recovery
Weak demand and prices for cathode materials and battery materials Industry factor Linked to EV demand, material prices, and customer inventories. Not an LG Chem-only issue
Earnings volatility in Advanced Materials Industry factor and company-specific factor Battery-material dependence, product mix, customer mix, and the quality of price management all matter
Consolidated LGES losses and investment burden Company-/group-specific factor A portfolio issue specific to LG Chem. The largest variable for consolidated credit quality
Increase in interest-bearing debt, increase in short-term debt, and weaker interest-payment capacity Company-specific financial factor Partly the result of industry headwinds, but from a credit perspective this is an issue of financial management and capital allocation
LGES share sales and asset sales Company-specific capital policy Provides scope for deleveraging, but requires confirmation of loss of control, use of proceeds, and allocation to shareholder returns

Petrochemicals is the area most heavily driven by industry factors. The existing report states that, when large Chinese facilities, feedstock advantages in the Middle East and the US, and sluggish global demand overlap, Korean naphtha-based assets struggle to secure spreads. Even if Petrochemicals returned to operating profit in 1Q 2026, this included inventory valuation effects and European anti-dumping tariff refunds, and therefore should not be treated as structural earnings recovery.

Advanced Materials sits between an industry cycle and a company-specific mix issue. The existing report states that Advanced Materials recorded revenue of KRW843 billion and an operating loss of KRW43 billion in 1Q 2026, and that while cathode volumes and new products provide support, profitability is affected by battery-material prices, demand, and utilization rates. Because the detailed figures raised in the discussion need to be reconciled with the confirmed figures in the existing report, this report gives priority to the figures in the existing report.

LGES is the mechanism that amplifies industry factors into LG Chem-specific credit constraints. Slowing EV demand and customer inventory adjustments are industry factors, but holding LGES as a consolidated subsidiary and absorbing North American investment, ESS capacity expansion, short-term debt, and subsidy dependence on the consolidated balance sheet are specific to LG Chem. The most accurate interpretation of LGES-related pressure is therefore that the industry factor is the trigger, while LG Chem's company-specific portfolio is the amplifier.

4. Forward View

For LG Chem, it is better to view the situation as a structural adjustment phase in which the company is testing for a bottom, rather than to declare it a recovery phase. The company has indicated Petrochemicals earnings retention, a return to profit in Advanced Materials, growth in LGES's ESS and cylindrical batteries, asset sales, and investment discipline. These are credit positives. However, all remain in progress, and a degree of certainty sufficient to materially restore rating headroom in the near term has not yet been confirmed.

In the near term, Petrochemicals could narrow losses or return partly to profit, but this should not be viewed as structural improvement until both volume recovery and margin improvement are confirmed. Advanced Materials is aiming to turn profitable through higher cathode volumes and high-value-added products, but because it depends on EV demand and material prices, the level of earnings is too thin to change the credit view on a standalone basis. LGES has growth drivers in ESS and the 46-Series, but it reported an operating loss of KRW207.8 billion in 1Q 2026, and growth has not yet fully translated into earnings and cash flow.

Medium-term improvement requires several conditions to be met at the same time. In Petrochemicals, LG Chem needs to restructure low-return assets and shift toward higher-value products. In Advanced Materials, it needs to stabilize earnings from cathode materials, semiconductor materials, and IT/Engineering Materials. In LGES, ESS and cylindrical batteries need to become profitable and capex needs to be restrained. Financially, asset sales and LGES share-sale proceeds need to be applied to deleveraging, short-term debt needs to be contained, and interest coverage needs to improve.

The credit base case is that signs of a business bottom may start to emerge, but leverage improvement will lag. LG Chem has business scale, the value of its LGES stake, access to capital markets, and scope for asset sales, so it is not an issuer likely to fall immediately into short-term liquidity stress. On the other hand, even if operating profit recovers, rating headroom will be difficult to restore if the benefit is absorbed by capex, short-term debt, non-operating losses, and shareholder-return allocation.

5. Rating Defense Posture

LG Chem and LGES appear to have a posture of maintaining investment-grade ratings. However, at this stage, it is difficult to assess that a strong commitment is sufficient to offset downgrade risk.

A positive factor is that LG Chem is trying to use asset sales and the monetization of LGES shares as tools for financial improvement. The existing LG Chem report confirms that, at the company's 2025 earnings announcement, LG Chem also referred to a policy of allocating around 10% of LGES share-sale proceeds to shareholder returns. This shows that the LGES stake is a large monetizable asset and that the company is aware of balance-sheet measures. At the same time, it also shows that the sale proceeds will not all be directed to debt repayment.

LGES has also cited capex restraint, non-core asset sales, working-capital management, and improved asset turnover. These measures could also benefit LG Chem on a consolidated basis. In particular, if LGES's investment burden peaks out and ESS and the 46-Series translate into operating cash flow, this would directly support improvement in LG Chem's consolidated leverage.

However, rating agency reactions remain cautious. The existing LG Chem report states that S&P affirmed the BBB ratings on LG Chem and LGES on 2026-03-05 while revising the outlooks to Negative. This indicates that there is no immediate downgrade at this point, but rating headroom has become thinner. For Moody's, based on secondary reporting, LG Chem and LGES were reportedly downgraded simultaneously to Baa2 in November 2025. In both cases, the agencies are not completely dismissing the companies' countermeasures, but this is also not a stage where comfort can be taken without evidence of execution.

Therefore, the assessment of the rating defense posture is that the intention to defend the rating is visible, but whether the rating can be defended remains unconfirmed. To defend the investment-grade rating, LG Chem will need not only announcements of asset sales, but also sufficient application of sale proceeds to debt reduction and liquidity preservation, reduced investment burden at LGES, non-transitory earnings improvement in Petrochemicals and Advanced Materials, and improvement in consolidated Debt/EBITDA and interest coverage.

6. Relation to LGES

The relationship between LG Chem and LGES is not a simple structure in which the parent company unilaterally supports the subsidiary. LG Chem is the parent company, but an important part of its credit quality depends on LGES's business value, growth potential, equity value, and capital-market valuation. LGES, meanwhile, is a listed subsidiary with its own debt, investment plans, cash, and non-controlling interests. LG Chem parent-company creditors cannot freely use LGES's cash.

The structure section in the existing LG Chem report addresses this point appropriately. On a consolidated basis, LGES's order backlog, ESS growth, and global production network support credit quality. For parent-company creditors, however, LGES shares are a monetizable asset but not a cash-equivalent repayment source. The amount available for debt repayment will depend on the timing of any sale, sale price, post-sale ownership, control, use of proceeds, and allocation to shareholder returns.

Based on the current discussion, the LG Chem report should more explicitly present LGES as both a support and a constraint. LGES supports LG Chem's value through future growth, non-China supply chains, ESS, and the 46-Series. However, as of 1Q 2026, LGES also had operating losses, subsidy dependence, capex, short-term borrowings, and negative FCF, making it the largest variable weighing on consolidated credit quality.

7. Monitoring / Next Check

In the next review of LG Chem, it is preferable to examine the following items in order, without mixing industry factors and company-specific factors.

Check item Reason for review
Petrochemicals operating profit, utilization rate, spreads, and one-off factors To distinguish between an industry bottom and temporary factors
Shutdowns, sales, or restructuring of low-return petrochemical assets To assess whether company-specific responses to the industry downturn are progressing
Advanced Materials cathode volumes, prices, inventory valuation, and operating profit/loss To separate the battery-material cycle from improvement in the company-specific mix
LGES operating profit/loss, profit excluding subsidies, and monetization of ESS and the 46-Series To confirm whether the largest consolidated variable is returning to being a support
Consolidated operating cash flow, capex, investing cash flow, and FCF To assess whether revenue recovery is translating into debt reduction
Short-term debt, total debt, net interest-bearing debt ratio, and interest coverage To directly assess rating headroom
Use of proceeds from LGES share sales and asset sales To confirm whether these measures contribute to deleveraging or are directed to shareholder returns or investment
Full original texts from S&P and Moody's To confirm downgrade triggers, incorporated support, and the definitions of adjusted leverage

The short practical message is that LG Chem cannot defend its rating merely by waiting for an industry recovery; it needs to defend the rating through its own capital policy and management of the investment burden. Even if petrochemical market conditions improve somewhat, rating headroom will not return if LGES's negative FCF and short-term debt growth continue. Conversely, stability at the lower investment-grade level would increase if non-transitory improvement in Petrochemicals, a return to profit in Advanced Materials, monetization of LGES earnings, and clear deleveraging through LGES share sales and asset sales all progress at the same time.

8. Unverified / Pending Items

In the current discussion, LGES share sales, capex restraint, non-core asset sales, and improved asset turnover were raised as elements of LG Chem's rating defense posture. However, as of the preparation date of the existing report, the exact size, timing, price, post-sale ownership, use of proceeds, debt-reduction amount, and allocation between debt reduction and shareholder returns for LGES share sales remain unverified items.

The full original texts from S&P and Moody's also remain unverified. For S&P, the existing report summarizes the Negative outlook, the Debt/EBITDA threshold of around 3.5x, and risks related to petrochemicals, EV batteries, and the ESS ramp-up, but the definitions of adjusted metrics and the downgrade and upgrade conditions need to be reconfirmed in the original text. For Moody's, the information is based on secondary reporting, and the precise basis for LG Corp support, LGES's consolidated contribution, the Baa2 rating, and the Stable outlook needs to be confirmed in the original text.

For individual bonds, guarantees, collateral, negative pledge, change of control, cross-default, subsidiary debt restrictions, and the covenant impact of LGES share sales have not been reviewed. Therefore, this report is an analysis of issuer credit and rating defense posture, and does not reach a conclusion on legal protection or relative value for any specific bond.

9. Reference Context

Existing reports within the project:

Main sources already used in the existing reports: