Rating Action: Moody's assigns Baa3 to SK Battery America's notes guaranteed by SK Innovation
Global Credit Research - 14 Jan 2021
Hong Kong, January 14, 2021 -- Moody's Investors Service has assigned a Baa3 rating to the proposed backed senior unsecured USD notes to be issued by SK Battery America, Inc. The proposed notes will be unconditionally and irrevocably guaranteed by its parent SK Innovation Co. Ltd. (SKI, Baa3 negative).
The outlook is negative.
SK Battery America plans to use the proceeds to finance or refinance existing and future projects that provide environmental benefits in accordance with the company's "green financing framework".
RATINGS RATIONALE
"The Baa3 rating reflects SKI's leading position as Korea's largest refining and marketing company, and vertically integrated and diversified operations, as well as a one-notch uplift based on Moody's assessment of strong institutional support from the Korean government (Aa2 stable)," says Wan Hee Yoo, a Moody's Vice President and Senior Credit Officer.
"At the same time, the rating also takes into consideration SKI's high exposure to the inherently cyclical refining market conditions, increasing debt levels to fund large capital spending and execution risks associated with its battery business," adds Yoo.
Moody's expects SKI's adjusted EBITDA to improve to KRW2.0 trillion-KRW2.5 trillion in 2021 and KRW3.0 trillion-KRW3.3 trillion in 2022 from a negative EBITDA in 2020, supported by recovering refining margins and petrochemical spreads as well as an increase in EBITDA from its fast-growing electric vehicle (EV) battery and lithium-ion battery separator (LIBS) businesses.
Nevertheless, earnings from its refining and petrochemical businesses for 2021 will be well below mid-cycle levels because of still-weak demand amid the ongoing negative impact from the pandemic.
At the same time, without significant deleveraging measures, Moody's expects SKI's adjusted net debt to increase to around KRW13.5 trillion by the end of 2021 and around KRW16.0 trillion by the end of 2022 from KRW11.6 trillion at the end of September 2020. This debt growth will be driven by moderate operating cash flow and continued large capital spending in its battery and LIBS businesses to fund rapid capacity expansion in these two businesses.
SKI aims to execute various deleveraging measures to contain its debt growth, but uncertainty remains about the timing and scale of such measures.
Based on these assumptions, Moody's expects SKI's adjusted net debt/EBITDA to stay weak at 6.0x-6.5x in 2021 and around 5.0x in 2022 compared with 3.7x in 2019. On the other hand, SKI's retained cash flow (RCF)/adjusted net debt should be 10%-15% over 2021-22, higher than the 5% reported in 2019, mainly because of lowered dividend payments.
These ratios are weak for the company's current underlying credit strength, and there are considerable downside risks to these assumptions, given the uncertainties over the severity of the impact from the coronavirus pandemic, the pace of earnings improvement in the company's EV battery business, and lawsuits with LG Chem, Ltd. (Baa1 stable). These factors drive the negative outlook.
The rating also takes into account the following environmental, social and governance (ESG) factors.
SKI benefits from the global trend to reduce carbon emissions, which should materially increase revenue and earnings of its EV battery business over the medium to long term, given its large order backlog. However, there remain significant uncertainties and execution risks in this business, considering its fast-growing nature as well as ongoing lawsuits in the US. In addition, large investments and losses from this business will strain the company's financial profile, at least during 2021-22.
SKI is also exposed to increasing environmental regulations and safety risks, especially from its refining and petrochemical businesses. However, these risks are mitigated by its good track record of environmental compliance and solid operational capabilities. In addition, SKI's EV battery business is exposed to risks associated with responsible production, given the inherent challenges in managing product quality in this new industry.
The rating also considers SKI's increasingly aggressive financial strategy, as evidenced by large debt-funded investments and a track record of elevated shareholder distributions.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook on SKI could return to stable if the company significantly increases its earnings or contains net debt growth at a manageable level, such that RCF/adjusted net debt exceeds 8%-10% and adjusted net debt/EBITDA stays below 4.5x-5.0x on a sustained basis.
Moody's could downgrade SKI's ratings if the company's financial metrics remain weak, such that RCF/adjusted net debt stays below 8%-10% or adjusted net debt/EBITDA exceeds 5.0x on a sustained basis, against the backdrop of continued weak industry fundamentals and/or a further increase in the company's investments or shareholder distributions.
The principal methodology used in these ratings was Refining and Marketing Industry published in November 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1040610. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
SK Innovation Co. Ltd. is the largest refining and marketing company in Korea by production volume and capacity. The company's operations are diversified into refining and marketing, petrochemical, exploration and production, lubricants and battery businesses.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Wan Hee Yoo VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Clement Cheuk Yiu Wong Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077
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