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Rating Action:

Moody's revises outlook on SK Innovation's and SK Global Chemical's Baa2 ratings to positive

 The document has been translated in other languages

26 Jul 2016

Hong Kong, July 26, 2016 -- Moody's Investors Service has affirmed the Baa2 ratings for SK Innovation Co. Ltd. (SKI), SK Global Chemical Co., Ltd. (SKGC), and SK Global Chemical Investment HK Ltd (SKGC HK).

At the same time, Moody's has changed the outlook on all the ratings to positive from stable.

The details of the ratings that are affected are as follows:

• SKI, Baa2 issuer and senior unsecured ratings

• SKGC, Baa2 issuer rating

• SKGC HK, Baa2 senior unsecured rating on the notes issued by SKGC HK and guaranteed by SKGC

RATINGS RATIONALE

"The change in the ratings outlook for SKI reflects our view that the company's financial profile will improve significantly in 2016, and stay strong for its current Baa2 ratings level over the next 1-2 years, because robust earnings and cash flows should lead to a continued decline in debt," says Wan Hee Yoo, a Moody's Vice President and Senior Analyst.

Moody's expects that SKI's consolidated operating income will increase to about KRW3.0 trillion in 2016 from KRW2.0 trillion in 2015, and will remain above KRW2.0 trillion in 2017, driven by improved earnings from its petrochemical and lubricants operations, as well as the absence of inventory-related losses. Such a situation should more than offset its weaker refining margins.

SKI's operating income grew 47% year-on-year to KRW1.96 trillion for the six months between January and June 2016 from KRW1.33 trillion during the same period in 2015, according to the company's announcement on 22 July 2016.

Moody's notes that the robust earnings were partly attributable to its improved competitiveness, aided by significant investments it made in its petrochemical and refining operations during 2012-2014.

In addition, Moody's expects that SKI's total debt will fall to about KRW6.5 trillion over the next 12-18 months, given its sizable cash balance, prudent investment strategy and healthy operating cash flow.

The company reduced its reported debt to KRW7.6 trillion at end-June 2016 from KRW8.2 trillion at end-2015, and its reported net debt fell to KRW1.4 trillion from KRW3.5 trillion over the same period.

Based on these assumptions, Moody's expects that SKI's retained cash flow (RCF)/adjusted debt will improve to about 30% over the next 12-18 months from 28% in 2015, and adjusted debt/capitalization should fall to about 28% from 35% at end-2015. These ratios are strong for the company's current underlying credit quality.

In addition, Moody's expects that SKI will maintain a sizable cash balance of at least KRW4 trillion, which will provide an adequate financial buffer against unexpected increases in working capital deficits or investments.

SKI's ratings continue to be underpinned by its leading position as Korea's largest refining and marketing company by refining capacity, and its vertically integrated and diversified operations.

These strengths are counterbalanced by its high exposure to the inherently cyclical market conditions, which leads to significant volatility in its operating results.

SKI's Baa2 ratings also factor in a one-notch uplift, owing to Moody's assessment that the company will receive strong institutional support in times of need, given the Korean government's (Aa2 stable) aim of ensuring stable oil supplies.

"The change in SKGC's rating outlook to positive mirrors the rating action on SKI's ratings, given SKGC's full ownership by SKI, and the close operational relationship between the two companies," adds Yoo.

Moody's also expects SKGC's financial profile to improve significantly in 2016 and remain strong over the next 12-18 months. For instance, its adjusted debt/EBITDA should decline to 1.5x-1.7x from 3.0x in 2015, absent significant debt-funded acquisitions or material spending.

The improvement will be mainly driven by improved earnings and a gradual decline in debt levels, stemming from healthy petrochemical spreads and moderate capital expenditures.

Moody's points out that SKGC's Baa2 rating continues to incorporate a one-notch uplift, based on Moody's assessment of SKI's strong willingness and ability to provide financial support to SKGC in the event of need.

Moody's would upgrade SKI's ratings if the company establishes a track record of maintaining a robust financial profile through debt reductions, such that its RCF/adjusted debt exceeds 24%-26%, and/or adjusted debt/capitalization stays below 30% on a sustained basis.

On the other hand, the ratings outlook would return to stable, if the company's RCF/adjusted debt falls below 24%-26%, or adjusted debt/capitalization exceeds 30% on a sustained basis, against the backdrop of a continued weakening in its industry fundamentals, and/or a material increase in investments, leading to a failure to reduce total debt levels.

In addition, any changes to SKI's ratings will likely lead to a corresponding rating action on SKGC.

The principal methodology used in rating SK Innovation Co. Ltd. was Refining and Marketing Industry published in August 2015. The principal methodology used in rating SK Global Chemical Co., Ltd. and SK Global Chemical Investment HK Ltd was Global Chemical Industry Rating Methodology published in December 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

SK Innovation Co. Ltd. is Korea's largest oil refining and marketing company by refining capacity, with crude distillation units of 1.115 million barrels/day. Its business portfolio is diverse, also covering areas including petrochemicals, lubricants, and exploration & production segments.

SK Global Chemical Co., Ltd. is one of Korea's leading petrochemical companies, with a 7.8 million tons of annual petrochemical production capacity at end-2015. The company is wholly owned by SK Innovation Co. Ltd.

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 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

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
Vice President - Senior Analyst
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
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

No Related Data.
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