SK Innovation’s credit profile has deteriorated over the past year due to the impact of the Covid-19 pandemic on its major subsidiaries, with two already downgraded.

On Monday (December 21) South Korean credit rating firm Korea Ratings lowered the rating of SK Energy from AA+ to AA0 and the rating of SK Incheon Petrochem from AA- to A+, with a stable outlook. Both lost one level. The outlook on SK Lubricants, which has an AA0 rating, was revised downward from positive to negative.

All had large operating losses, weak financial stability and uncertainty about their earnings. SK Energy, hit by weak oil prices and pressure on refinery margins, posted an operating loss of 1.7 trillion won ($1.55 billion) in the year through September.

SK Incheon Petrochem recorded an operating loss of 606.6 billion won in the first three quarters, with its revenue decreasing 39% year-on-year to 3.35 trillion won. The company’s ratio of total borrowings to total assets also increased to 49.3%.

The credit profile of SK Lubricants has deteriorated this year because of the fallout from Covid-19, increased capacity in the industry and large dividend payments. Its revenue declined 28.5% to 1.96 trillion won for the year through September, with operating profit margin falling to 7% from 16% a year earlier.

The weak earnings of the three companies have had a negative impact on the consolidated financial statements of SK Innovation, which owns 100% stakes in all units, putting the credit rating of the holding company at risk of being downgraded.

Korea Ratings is paying close attention to SK Innovation’s ratio of total borrowings to earnings before interest, tax, depreciation and amortization (EBITDA), which has further deteriorated this year. There was negative EBITDA in the year to September.

Global credit rating firms already downgraded SK Innovation earlier this year. Moody’s lowered the issuer and senior unsecured ratings from Baa2 to Baa1 in February, while S&P Global Ratings cut the company’s credit rating from BBB to BBB- in November.

However, SK Innovation’s planned share sales could increase cashflows in the coming year, possibly resulting in an improved credit profile, industry watchers said.

The firm has recently entered into talks with potential buyers for up to 49% of SK Lubricants, which is likely to be valued at more than 3 trillion won. SK IE Technology, of which SK Innovation owns 90%, has also recently filed for an initial public offering (IPO). SK Innovation is expected to sell between 25% and 30% of its shareholding in the planned IPO of SK IE Technology, which targets a valuation of 5 trillion won.

SK Innovation had net borrowings of about 1.56 trillion won at the end of September, after deducting 577.8 billion won in cash and cash equivalents from total borrowings of 2.13 trillion won.

“Both (minority stake sales and IPOs) are events that could lead to a significant improvement in the credit profile of SK Innovation. We will continue to watch and monitor the company’s credit profile,” said an official at one credit rating firm. (Reporting by Joon-woo Nam)