SK Innovation recently received a downgrade notice from the international credit rating agency Moody's amid ongoing poor performance in its electric vehicle battery business. With the difficulties in issuing bonds in overseas markets and the increasing likelihood of a downgrade from domestic rating agencies, concerns about financial burdens are growing.
According to the financial investment industry on the 19th, Moody's downgraded SK Innovation's credit rating from an investment grade of 'Baa3' to a non-investment grade of 'Ba1' on the 15th. This indicates that it is assessed as a company that should not be invested in due to high loss risks.
SK Innovation merged with SK E&S last November. After the merger, SK E&S changed its name to SK Innovation E&S and is currently operated as an internal independent company (Company In Company·CIC) of SK Innovation. At the time of the merger, there was high anticipation in the financial market for improving financial structures, but the ongoing poor performance of its electric vehicle battery subsidiary, SK On, has led to a downgrade in its credit rating.
Moody's pointed to SK Innovation's substantial liabilities and the deteriorating financial structure of its subsidiaries as reasons for the downgrade. The credit rating of SK Geocentric, a subsidiary in the chemical sector, was also downgraded from Baa3 to Ba1. The bond rating of SK Battery America (SKBA), the U.S. corporation of SK On, was downgraded from Baa3 to Ba1.
SK Innovation's liabilities surged by 137%, from 29.9 trillion won in 2021 to 70.9 trillion won at the end of last year. Short-term borrowings increased from 8.2 trillion won in 2023 to 12.5 trillion won last year, while corporate bonds and long-term borrowings rose from 17.7 trillion won to 27.0 trillion won. An SK Innovation official noted, "Moody's credit downgrade is a temporary effect following SK On's expansion and investment, and there is a high chance that the financial structure will improve this year," adding that "the credit ratings of domestic agencies have been maintained, so the impact is limited."
In the financial market, projections indicate that SK Innovation's long-term financial burdens will increase. Moody's downgrade to a non-investment level makes it difficult to issue foreign currency bonds, leading to a greater dependence on domestic funding.
Many observers believe that Moody's downgrade will negatively affect the rating evaluations of domestic agencies. Korea Credit Rating (KCR), Korea Ratings, and NICE Investors Service, the top three domestic rating agencies, currently assess SK Innovation's unsecured bonds as 'AA, stable.' All three agencies downgraded the credit rating from 'AA+' to 'AA' in 2020 and have yet to make adjustments.
SK Innovation's financial health indicators significantly deteriorated last year, meeting the criteria for a downgrade by domestic rating agencies. Hanwha Rating stated that if the ratio of net borrowings to earnings before interest, tax, depreciation, and amortization (EBITDA) exceeds seven times, the rating will be downgraded. This indicator reflects the company's liquidity relative to profitability, and a higher figure indicates greater debt burdens. Korea Ratings will downgrade the rating if this ratio exceeds four times.
SK Innovation disclosed in its investor relations materials released last month that its net borrowings last year amounted to 28.5 trillion won, with an EBITDA of 2.8 trillion won. The ratio of net borrowings to EBITDA reached 10.3 times. In 2023, SK Innovation's net borrowings were 15.6 trillion won, with an EBITDA of 4.1 trillion won, leading to a ratio of 3.8 times. However, last year the downturn in the electric vehicle business reduced profits, while soaring facilities investment and interest expenses significantly increased the ratio.
The performance of its subsidiary SK On is also unlikely to rebound in a short period. The Biden administration, which was launched this year, has revealed plans to reduce support and benefits for electric vehicles, indicating that the downturn in the battery market is likely to persist for the time being. SK On is collaborating with Ecopro to build a cathode material factory in Canada, but President Biden has stated intentions to impose high tariffs on Canadian products.
An official in the financial investment industry said, "With Moody's credit downgrade, domestic rating agencies that have maintained SK Innovation's rating for the past five years also find it difficult to delay adjustments any longer. If performance does not significantly improve in the short term, there is a high possibility that obtaining funds domestically will also become challenging."