Highest Ever

SK Innovation got a record high rating BBB+ from the global rating firm S&P last year since its foundation.
SK Innovation got a record high rating BBB+ from the global rating firm S&P last year since its foundation.

 

SK Innovation, a Korea-based refining and petrochemical producer, got a record high rating BBB+ from the global rating firm S&P last year since its foundation.

SK Innovation announced on January 25 that S&P Ratings Global raised the long-term corporate credit rating of the company to 'BBB+' from 'BBB' and set the outlook as “stable.”

The credit rating that SK Innovation got this time is the highest among those of the local oil refining companies.

S&P upgraded SK Innovation to reflect its expectation that the Korean company is likely to maintain a prudent financial policy and solid operating cash flow over the next 12-24 months, as reflected in solid credit metrics. S&P estimated that the Korean oil company will maintain an adjusted ratio of debt to EBITDA at around 1x during this period.

S&P Ratings Global expects the credit quality of SK Innovation to become less vulnerable to the volatility in oil refining and petrochemical industries over the next 12-24 months given its prudent financial policy, as shown by its much lower debt level than in the past.

The global rating company also expects fewer swings in oil prices and the demand-supply dynamics of the regional oil refining and petrochemical industries, which could support solid operating cash flow for SK Innovation over the next 12-24 months.

In particular, S&P said the stable outlook reflects its expectation that SK Innovation is likely to maintain its debt-to-EBITDA ratio at around 1x over the next 12-24 months, given its prudent financial policy and solid operating cash flow. S&P based its expectation on SK Innovation’s reduced vulnerability to industry volatility, given its prudent financial policy as indicated by a much lower debt level. S&P also based its expectation on SK Innovation's solid operating cash flow, given fewer swings in oil prices and a stable refining and petrochemical demand and supply balance.

At the same time, S&P raised the issue rating on the company's outstanding senior unsecured notes to 'BBB+' from 'BBB'.

S&P analyzed that SK Innovation is likely to maintain a prudent financial policy without increasing its debt level significantly over the next 12-24 months. S&P, however, also anticipated the Korean oil refiner would increase dividends and investments, such as investments for geographical diversification in its core businesses. S&P also expected the Korean refiner to be able to fund a large portion of increasing investments of 2.5 to 3.0 trillion won annually during the 2017-2018 period from less than 1 trillion won annually in 2015-2016. That's in addition to some increase in dividends during the period through solid operating cash flow generation.

S&P also believed the Korean company has the flexibility to manage investments and dividends depending on operating cash flow, as shown when it stopped paying dividends and reduced investments substantially over the 2015-2016 period.

The rating company expected SK Innovation's much lower debt level to make its credit metrics less vulnerable to volatility in the oil refining and petrochemical industries. The company's debt level substantially declined to around 3 trillion won as of the end of 2016 from more than 9 trillion won as of the end of 2014, due to robust operating performances and low investments from oil refining and petrochemical business.

S&P also expected SK Innovation to continue to generate solid operating cash flows over the next 12-24 months despite its expectations for some normalization of margins from peak-of-the-cycle levels in 2015-2016. The rating company based the forecast on its expectation of a reduced swing in the oil prices and the demand-supply balance in the regional refining and petrochemical industries. In S&P’s view, the industries' margins are likely to remain stable in Asia-Pacific, given the likelihood of sustained demand, moderate capacity additions, and lower oil prices than in the past. S&P saw these factors would encourage demand but discourage capacity additions, even though the oil price has been recently trending upward.

Based on the above factors, S&P has revised the financial risk profile on SK Innovation to “modest” from “intermediate.”

As a downside scenario for SK Innovation, the rating company said it may lower the ratings if SK Innovation's adjusted debt-to-EBITDA ratio approaches 1.5x on a sustained basis. S&P said this may be a result from significant deterioration in operating cash flow as a result of weaker refining and petrochemical margins than it expects and higher swings in the oil price. S&P added this also may be a result of the company's financial policy becoming more aggressive in terms of significantly increasing investments and dividends.

As a upside scenario for SK Innovation, S&P saw a limited upside potential over the next 12-24 months, mainly because of inherent volatility in the industry and SK Innovation's increasing investments and dividends. Despite it, the rating company said it may raise the rating if SK Innovation substantially increases its scale and diversifies its business portfolio, resulting in significantly reduced volatility in its operations, while it maintains a low debt level.

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