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Fitch: Samsung Arrest Negative for Image but Credit Stays Intact
February 20, 2017 / 8:06 AM / 7 months ago

Fitch: Samsung Arrest Negative for Image but Credit Stays Intact

(The following statement was released by the rating agency) SEOUL/SINGAPORE, February 20 (Fitch) The arrest of the heir apparent to the Samsung conglomerate, Lee Jae-yong, is unlikely to disrupt the company's day-to-day operations or significantly undermine its strong financial performance, which is underpinned by Samsung's market dominance and technology leadership, says Fitch Ratings. However, the arrest is likely to delay strategic investment and weigh on investor sentiment, at least in the short term. It also poses another potential risk to the brand's reputation. The arrest is likely to put on hold strategic decisions - including those over plans for global acquisitions - which were outlined by Mr Lee. However, each of Samsung's business segments is run by its own professional management team. Day-to-day operations are therefore likely to be unaffected by Mr Lee's absence - as has also been the case when heads of chaebols have been arrested or prosecuted in the past. Mr Lee - whose official position is vice-chairman of Samsung Electronics Co. (SEC, A+/Stable) - faces charges of perjury, embezzlement and bribery over claims that Samsung gave funds to President Park Geun-hye's adviser in exchange for political favours. His arrest has received considerable international attention and could have a negative impact on Samsung's image, particularly if the trial process becomes lengthy. The negative publicity also comes fresh on the heels of the recall and production suspension of the Galaxy Note 7 phone, which Fitch viewed as a potential threat to Samsung's brand. There is no immediate impact on SEC's credit rating, which is supported by its technological leadership, its dominant position in its core markets, and strong financial metrics. SEC operates in sectors such as the handset business, where market share can shift quickly. However, SEC's long-term market leadership is likely to hinge on its ability to continue delivering innovative products, and we would expect the recent damage to the company's image to be overcome by future strong product offerings. In that respect, SEC's financial position supports its ability to fund the substantial capital expenditure that keeps it among the world's leading technology companies. It appears to be taking particular care with the launch of the Samsung Galaxy S8, which has been delayed to allow for extra quality control and safety tests to ensure there is no repeat of the Note 7 fiasco. Mr Lee's arrest highlights corporate governance weaknesses at Samsung, but it may also increase pressure on the company to address these problems. The Samsung conglomerate had previously announced it will disband its "future and strategy" office - used to make the group's key decisions - which was under public scrutiny for favouring the Lee family over the interests of other stakeholders. This office could now remain in place until Mr Lee's case is resolved. However, the increased scrutiny on Samsung, and the rising clamour for a more general change in Korea's corporate culture, means that we expect Samsung to make further changes to its structure in favour of shareholder interests, greater transparency and improved governance. Contact: Shelley Jang Director Corporates +82 2 3278 8370 Fitch Ratings Australia Pty., Korea Branch 9F Kyobo Securities Building 26-4 Youido-Dong, Youngdeungpo-Gu Seoul Dan Martin Senior Analyst Fitch Wire +65 6796 7232 Media Relations: Leslie Tan, Singapore, Tel: +65 67 96 7234, Email: leslie.tan@fitchratings.com; Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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