South Korean companies may see credit quality deteriorate in the next 12 months primarily due to aggressive financial policies amid worsening trade and macroeconomic conditions, but abrupt downward rating revisions are unlikely, forecast Standard & Poor’s on Tuesday.

“After a robust performance in the three years to 2017, Korean companies are entering a credit downcycle – albeit a moderate one,” said Park Jun-hong, a credit analyst at S&P Global Ratings. “We attribute the fall in credit quality primarily to companies’ more aggressive financial policies, with heightened capital outlays, shareholder returns, and merger and acquisition activity.”

The analyst’s comments were made in a report titled, “Korean Corporates Enter a Credit Downswing.”

S&P said that a significant increase in capital expenditure, dividend payouts, share buybacks, and merger and acquisition activity would impair the companies’ cash flows, making it difficult to cover all of the planned uses. It expected several companies to cover the shortfall through debt expansion.

Citing such a sharp rise in spending on non-operational activities, the global credit rating company earlier has revised down its rating outlook on all SK Telecom Co., SK Innovation Co., SK Broadband Co., LG Chem Ltd., and SK E&S Co. from stable to negative since earlier this year. These companies have turned particularly aggressive in M&A activities in search of new business opportunities and improving shareholder value in recent years. It last year also downgraded both the rating and outlook of Hyundai Motor Group due to similar reasons.

S&P projected that the Korean economy will face growing challenges from slowing global demand in key industries such as semiconductors, smartphones, and automobile amid trade tension and protectionism, which would add woes to Korean companies. It noted Korea’s exports, the main driver of its economy, are already on a downward trend.

“We expect the creditworthiness of Korean companies to remain under pressure over the next 12 months,” it said.

The report, however, noted that it will be unlikely for Korean companies to “suddenly lose their rating stability,” given their good operating efficiency and competitive product offerings.

By Chung Seok-hwan and Lee Eun-joo

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