SK Innovation's Capital-Market Exposure Nears KRW 10 Trillion [fn Market Watch]

[Financial News] SK Innovation's financial burden extends beyond conventional borrowings, making it significantly larger than the marketable borrowings reported on its books. When corporate bonds, commercial paper (CP), securitized securities and price return swaps (PRS) are combined, its capital-market exposure approaches KRW 10 trillion.
According to investment banking industry sources on the 1st, SK Innovation's outstanding corporate bonds, CP and electronic short-term bonds totaled KRW 5.2138 trillion.
Adding KRW 808.7 billion in related securitized securities and approximately KRW 3.8 trillion in outstanding PRS contracts backed by new shares of SK On and SK IE Technology (SKIET) brings the simple combined exposure to approximately KRW 9.8 trillion. This figure excludes borrowings from banks and other financial institutions. In other words, additional financial exposure of about KRW 4.6 trillion exists, equivalent to 88% of its marketable borrowings. By contrast, cash and cash equivalents stood in the KRW 2 trillion range on a standalone basis at the end of June.
A PRS is a derivatives-linked transaction that settles the difference between a predetermined reference price and the future disposal price of an underlying stock.
If the stock price falls, the company pays the difference to investors; if it rises, the company receives the gain. Although legal ownership of the shares is transferred to investors, the risk of price fluctuations remains with the company. For this reason, the credit rating industry views PRS transactions as combining the characteristics of formal equity transactions and economically equivalent borrowing.
SK Innovation's PRS transactions differ in nature from simple securitization of shares it holds. According to Korea Investors Service (KIS), the outstanding PRS balance related to new shares of SK On and SKIET amounts to KRW 3.8 trillion, accounting for approximately 54% of SK Group's total PRS balance of KRW 7.1 trillion.
A substantial portion of the structure is linked to capital increases by subsidiaries. Although the funds raised from investors flow into the subsidiaries, the price risk of the underlying assets and the obligation to settle with investors remain with the parent company that entered into the PRS contracts.
KIS analyzed subsidiary capital-increase PRS transactions as "a structure in which the parent's credit enhancement is effectively provided for the subsidiary's financing." Jung Ik-soo, a senior analyst at KIS, noted, "PRS transactions can constrain a company's financial flexibility and refinancing capacity beyond the level of debt shown on its financial statements." This means that while the funds flow into the subsidiaries, their business risks may be transferred to the parent company in the form of settlement obligations because the price risk remains with the parent.
Concerns have emerged that a decline in the value of underlying assets such as those of SK On could increase SK Innovation's PRS settlement burden.
SK On, in particular, is an unlisted company, creating uncertainty over the value of the underlying assets and investors' future exit routes. At maturity, this could return to SK Innovation as a settlement, repayment or refinancing burden. SK Innovation has already recognized KRW 1.2169 trillion in valuation losses on derivatives related to SK On and SKIET in the first half of this year alone.
The concern is that three sources of funding demand could converge: refinancing corporate bonds and CP, meeting the maturities of securitized securities, and settling PRS transactions.
Once bank loan maturities are added, the funding schedule SK Innovation must actually manage will exceed its KRW 9.8 trillion in financial exposure. A market expert pointed out, "More important than price fluctuations themselves is when the associated risk turns into a cash claim." The investment banking industry is closely watching the credit-rating triggers embedded in SK Innovation's PRS transactions. If the credit rating falls by three notches or more from its current AA0 level, investor-protection measures such as early settlement or the provision of additional collateral may be triggered.
The burden may not end with SK Innovation. A market source said, "SK On's business risks could be transferred to SK Innovation as a cash burden," adding, "If additional support for subsidiaries and the refinancing burden for corporate bonds and bank borrowings are added, this could also affect the group's overall capacity to provide support and refinance its debt."
An SK Group official said, "Operating cash flow has been solid due to strong performance in refining, batteries and other businesses, and as the financial structure continues to improve through rebalancing and other measures, the impact on debt repayment is limited."

[email protected] Kim Hyun-jung Reporter