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Rating Action:

Moody's changes to negative outlook for SK Innovation and SK Global Chemical

 The document has been translated in other languages

28 Jul 2014

Hong Kong, July 28, 2014 -- Moody's Investors Service has revised to negative from stable the outlook on the:

• Baa2 issuer and senior unsecured ratings of SK Innovation Co., Ltd (SKI)

• Baa2 issuer rating of SK Global Chemical Co., Ltd (SKGC)

• Baa2 senior unsecured rating of SK Global Chemical Investment HK Limited, which is guaranteed by SKGC

At the same time, Moody's has affirmed the Baa2 on the issuer and senior unsecured bond ratings.

The rating action is in response to SKI's announcement of its weak earnings for the second quarter of 2014 on July 25.

RATINGS RATIONALE

"The outlook revision reflects SKI's weak operating results in 1H 2014 and the high likelihood that SKI's profit margins and debt metrics will not recover materially during the next 12-18 months, despite additional operating cash flow from the commercial operations of new petrochemical facilities in 2014-15," says Mic Kang, a Moody's Vice President and Senior Analyst.

The change in outlook for SKGC and its guarantee debt follows the change for SKI, given its close ownership and operational relationship with the parent.

SKI's preliminary operating profit for the first half declined to KRW180 billion from KRW1,091 billion a year earlier, as a result of continued weak refining margins and a material drop in the paraxylene spread.

Increasing supply, from mostly China, India and the Middle East, as well as price volatility for refined oil and paraxylene products -- SKI's core businesses -- will mean that the segments' profit margins will remain weak.

The margin pressure on its core products will unlikely be offset by diversification into upstream exploration and production (E&P) and lubricants over the next 12-18 months.

Given this factor and its sizeable capital expenditures in 2014, SKI's leverage will remain high.

As such, Moody's expects SKI's RCF/debt and debt/capitalization to remain weak at below 12%-14% and above 40%-42% over the next 12-18 months, in the absence of deleveraging measures. These levels are weak for its Baa2 rating.

SKI plans to improve its financial profile through cutting discretionary capital expenditures and deleveraging activities.

"While the deleveraging plan is a positive development, there is execution risk, so the plan does not offset the emergence of pressure on SKI's credit strength," adds Kang.

SKI's Baa2 rating includes an uplift of one notch, owing to strong institutional support for the refining sector for the purpose of ensuring a stable oil supply, given Korea's heavy reliance on oil imports.

Moody's would revise the ratings outlook to stable if SKI materially improves its financial profile, such that retained cash flow (RCF)/adjusted debt stands above 16%-18% and/or debt/capitalization stays below 38%-40% on a sustained basis.

Moody's could downgrade the rating if SKI's RCF/adjusted debt remains below 16%-18% or debt/capitalization stays above 38%-40% on a sustained basis, amid continued weakening of refining and petrochemical fundamentals.

The principal methodology used in rating SK Innovation Co. Ltd was the Global Refining and Marketing Rating Methodology published in December 2009. The principal methodology used in rating SK Global Chemical Co., Ltd and SK Global Chemical Investment HK Limited was the Global Chemical Industry Rating Methodology published in December 2013. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

SK Innovation Co Ltd is Korea's largest oil refining and marketing company with crude distillation units of 1.115 million barrels/day. In addition, SK Innovation has a diversified business portfolio that includes the petrochemical, lubricants, and E&P segments.

SK Global Chemical Co. Ltd. (SKGC) is one of Korea's leading petrochemical companies with 7.7 million tons of petrochemical production capacity as of end-2013. SKGC, wholly owned by SK Innovation, is strategically important within SKI's entire value chain, which includes exploration and production, refining, petrochemicals and lubricants.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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.

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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.

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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.

Mic Kang
Vice President - Senior Analyst
Project & Infrastructure Finance
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
SUBSCRIBERS: (852) 3551-3077

Gary Lau
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (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
SUBSCRIBERS: (852) 3551-3077

Moody's changes to negative outlook for SK Innovation and SK Global Chemical
No Related Data.
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