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LG Energy Solution Additional Discussion Report: Group Rating Linkage and Recovery View

LG Energy Solution Additional Discussion Report: Group Rating Linkage and Recovery View

1. Purpose and Treatment

This report is a supplementary note that reviews the discussion on the parent-subsidiary relationship between LG Chem and LG Energy Solution (LGES), rating linkage, and earnings outlook in light of the existing issuer_summary. It does not treat claims made in the discussion as newly confirmed facts. Instead, it separates issues already confirmed in the existing reports, interpretations developed further in the discussion, and items requiring additional verification.

The conclusion is consistent with the direction of the existing LGES report, but the treatment of parent-related factors should be made somewhat more explicit. The existing report notes that LG Chem owned 79.38% of LGES shares as of end-December 2025, that LGES is a strategically important subsidiary within the LG group, but that LG Chem should not be treated as providing a parent guarantee or legal credit enhancement. In the present discussion, the main issues were how the deterioration in parent company LG Chem’s performance could feed through to LGES, how far the rating agencies view the two companies on an integrated basis, and to what extent LGES’s recovery scenario could mitigate that linkage.

2. Discussion Takeaway

From LGES’s perspective, the parent factor is not a simple positive factor in the sense that a strong parent supports the subsidiary. Rather, the more important points at this stage are that LGES’s rating is likely to be closely linked to the group as a core subsidiary of the LG Chem group, and that LG Chem’s own credit quality also depends on LGES’s investment burden and earnings volatility.

The existing LGES report treats it as confirmed that S&P affirmed the BBB ratings of LG Chem and LGES on 2026-03-05 and revised the outlooks from Stable to Negative. For Moody's, the report refers to secondary reporting that Moody's downgraded LG Chem and LGES simultaneously to Baa2 in November 2025, while noting that the original Moody's release has not been obtained. Even this evidence makes it difficult to treat LGES as a credit fully independent from its parent and group.

Accordingly, when assessing LGES’s downgrade risk, the analysis should be anchored more closely in recent rating agency actions than in the general proposition that a strong subsidiary may not necessarily be downgraded at the same time as its parent. At least within the currently confirmed scope, LG Chem and LGES are being treated as highly linked. A clearer recovery at LGES itself would provide a buffer, but as of 1Q 2026 LGES still had an operating loss, subsidy dependence, a large free cash flow deficit, and rising borrowings. There is therefore limited room to assess LGES separately from parent and group factors.

3. Parent / Group Linkage

LGES’s rating is better understood not as being mechanically uplifted by a certain number of notches due to an explicit guarantee from parent company LG Chem, but as being strongly linked to the parent and the consolidated group credit profile because LGES is a core business entity within the LG Chem group. The existing LGES report frames LG Chem’s presence as a factor that may support ordinary-course capital market confidence, while stating that LG Chem’s credit quality should not be treated as a legal repayment source for LGES debt. This framework is appropriate.

However, in light of the discussion, the LGES report could more explicitly describe the following transmission channels.

Parent / group factor Credit implication for LGES Current reading
Deterioration in LG Chem group credit quality Not only LGES’s stand-alone position, but also leverage and investment burden across the consolidated group, reduce rating headroom S&P’s recent outlook revision was simultaneous for the parent and subsidiary, indicating linkage
Decline in parent support capacity Additional equity support for LGES or the parent’s role in supporting market confidence could weaken LG Chem itself has limited headroom due to petrochemicals, materials, and LGES-related investment burden
Risk of LGES share sale Could be used as a deleveraging tool by LG Chem, but may affect ownership ratio, control, and market perception An important capital policy risk for LGES long-term bonds
Dividend and cash upstreaming pressure If the parent’s funding needs increase, pressure may emerge for dividends or cash upstreaming from LGES LGES itself also requires substantial investment funding, making capital allocation a key focus
Integrated market access If investors view LG Chem and LGES as the same group risk, this could feed through to issuance terms Ratings, outlooks, and spreads should be monitored side by side for the parent and subsidiary

Under this framework, the parent factor is both a positive support factor and a downside linkage risk. If LG Chem were a very strong parent with credit quality clearly stronger than LGES on a stand-alone basis, it would be easier to frame parent support as upward credit enhancement. However, the current LG Chem faces a petrochemical downturn, weakness in Advanced Materials, LGES-related investment burden, and deterioration in consolidated leverage. As a result, from LGES’s perspective, the parent factor has a stronger character as downside linkage risk from an integrated group assessment than as upward enhancement from a strong sponsor.

4. Recovery View

LGES may be entering a recovery phase, but for credit analysis purposes this should still be viewed not as a “confirmed recovery” but as an early recovery scenario based on product transition.

The existing LGES report confirms that 1Q 2026 revenue was approximately KRW6.6 trillion and operating loss was KRW207.8 billion. Revenue included an estimated KRW189.8 billion in North American production incentives, but LGES still reported an operating loss. This indicates that underlying earnings power had not yet sufficiently recovered even including subsidies.

At the same time, management is positioning 2026 not as a year of recovery based only on EV pouch batteries, but as a year of product transition towards ESS, 46-Series cylindrical batteries, LFP, LMR, and high-voltage mid-nickel products. Based on the 1Q 2026 release, the existing report confirms that the 46-Series cylindrical battery order backlog exceeded 440GWh as of end-April, new orders in 1Q exceeded 100GWh, and North American ESS production capacity is expected to increase to more than 50GWh by year-end. These factors would reduce dependence on pouch-type EV batteries and form the core of the recovery scenario.

However, order backlog and production capacity are not repayment sources by themselves. They become earnings and cash flow only after passing through pricing, operating timing, yield, actual customer demand, policy requirements, working capital, warranty costs, and capital expenditure. The fact that ESS ramp-up costs contributed to the operating loss in 1Q 2026 indicates that even growth areas themselves can place short-term pressure on earnings and liquidity.

LGES’s management outlook is based on a turnaround driven by ESS, cylindrical batteries, North American local production, capex discipline, non-core asset sales, and improved asset turnover. These are credit-positive factors. However, to sufficiently offset downward rating pressure, actual evidence is needed in operating profit excluding subsidies, free cash flow after capex reductions, net debt, short-term debt rollover, and stabilisation of the rating outlook.

5. What Should Be Reflected in the Main Report

The existing LGES report already addresses the absence of a parent guarantee, simultaneous S&P/Moody's actions on the parent and subsidiary, the transition towards ESS and 46-Series products, subsidy dependence, and negative free cash flow. In light of the present discussion, however, the following points should be made more explicit in the next issuer_summary update.

LGES’s rating is not fully independent from LG Chem. S&P has moved LG Chem and LGES simultaneously, and at least within the currently confirmed scope, LGES is being treated substantially on an integrated basis as a core subsidiary of the LG Chem group. As no explicit parent guarantee for LGES has been confirmed, this should be viewed as linkage to group credit quality rather than a parent-support notch uplift. Accordingly, deterioration in LG Chem’s credit quality could reduce LGES’s rating headroom through lower support capacity, LGES share-sale risk, dividend and cash-upstreaming pressure, and weaker market access. At the same time, the core source of actual downward pressure is that LGES’s own free cash flow deficit, rising borrowings, subsidy dependence, and slower EV demand are worsening LG Chem’s consolidated credit profile and feeding back into ratings for both the parent and subsidiary.

This framing avoids both overstating and understating the parent factor. It recognises LGES’s business franchise and recovery scenario, while maintaining the balanced view that LGES should not yet be viewed as a stable credit independent from parent and group factors.

6. Monitoring / Next Check

In the next review, LGES on a stand-alone basis and the LG Chem group should be assessed side by side. The priorities are as follows.

Check item Meaning for LGES
Full text of S&P’s March 2026 release and current outlook display Precise confirmation of equal ratings between parent and subsidiary, core subsidiary treatment, and downgrade triggers
Latest original Moody's release Confirmation of the Baa2 downgrade, parent-subsidiary linkage, support incorporation, and rationale for the outlook
Operating profit/loss from 2Q 2026 onward and North American production incentives Distinguish between subsidy-dependent recovery and improvement in underlying earnings
Profit excluding subsidies, operating cash flow, capex, and FCF Confirm internal cash generation capacity required to maintain the rating
Short-term borrowings, net debt, and liquidity Confirm investment burden and refinancing dependence
Mass-production yield, margins, and customer demand for ESS and 46-Series Assess whether order backlog converts into earnings and cash flow
LG Chem’s LGES share sale, dividend policy, and use of proceeds Assess the impact of parent capital policy on LGES
Guarantees, keepwell, support agreement, change of control for individual bonds Confirm whether the parent relationship can be treated as legal credit enhancement

The practical message at this stage is that LGES is not a credit that must necessarily be avoided, but neither is it an issuer for which parent and group linkage can be viewed lightly. Even if ESS and 46-Series products generate revenue growth, rating headroom is unlikely to recover unless profit excluding subsidies and free cash flow improve alongside that growth.

7. Unverified / Pending Items

In the present discussion, the understanding was raised that S&P treats LGES as a core subsidiary of LG Chem and aligns the ratings of the two companies at the same level. However, the existing report has only limited confirmation of the full S&P source text. In the next update, the original text should be reviewed to confirm references to core subsidiary, equalisation, group credit profile, stand-alone credit profile, support assessment, and downgrade triggers.

For Moody's as well, the simultaneous downgrade in November 2025 is based on secondary reporting, and the original release has not been obtained. The original text needs to be reviewed to confirm how far Moody's views parent support as a positive factor, or how far it reflects LG Chem’s consolidated leverage in LGES’s rating.

For individual bonds, LG Chem guarantees, keepwell arrangements, support agreements, cross-default clauses, change of control provisions, asset-sale restrictions, and subsidiary debt restrictions have not been confirmed. Therefore, this report is a review of issuer credit quality and rating linkage, and does not conclude on the legal protection or recovery prospects of any specific bond.

8. Reference Context

Existing project reports:

Key sources already used in the existing reports: