SK units at risk of rating cuts on aggressive investments

South Korea’s SK Group units focusing on investments in new eco-friendly industries are facing risks of credit rating downgrades.

Investors have been worried that the group’s investments are too aggressive, even as it will take time to earn profits from the emerging sectors. The recent spike in interest rates boosted concerns over their business expansion, as well as mergers and acquisitions on increasing debts. The South Korean conglomerate’s use of private equity funds to raise money is also likely to come back to haunt it in the longer term, some critics pointed out.

SK E&S’ SPEEDING

SK E&S Co., the natural gas business unit of SK Inc., on Tuesday decided to inject $400 million into its US subsidiary, while guaranteeing 100 billion won ($81.3 million) in corporate bonds issued by a hydrogen business subsidiary IGE, according to filings to South Korea’s financial regulator on Tuesday.

The decisions came a few days after S&P Global Ratings revised the outlook of SK E&S’ credit rating to “negative” from “stable” on its aggressive spending plans, indicating the rating agency may lower the company’s current rating of BBB- in the next 24 months.

SK E&S, whose main businesses include imports and sales of liquefied natural gas, has been expanding investments with a goal to become a global major eco-friendly energy company. SK E&S acquired Key Capture Energy LLC (KCE), a US operator of energy storage projects, to expand its presence in one of the world’s largest grid solutions markets. It also decided to invest up to $400 million in Rev Renewables LLC, a US energy solution company, while purchasing a 47% stake in Parking Cloud, South Korea’s smart parking control solution provider.

This level of investment in such a short time stoked concerns over SK E&S’ capital base. Its total spending for acquisitions of stakes in new businesses such as an LNG project in Australia was estimated at 3.3 trillion won, far exceeding an earlier expectation of 2.5 trillion won, according to S&P.

SK E&S raised 2.4 trillion won from KKR& Co. that has secured exclusive negotiating rights to buy the company’s newly issued preferred shares, but that was not enough to improve its financial status. SK E&S’ debt ratio reached 204% as of the third quarter of last year.

The company was predicted to spend significantly more. S&P expected its capital expenditure to total at up to 1.7 trillion won this year and the next, saying its debt is likely to increase even as it sells assets of 400 billion won to 500 billion won. The agency forecast that SK E&S’ debt would rise to as much as 8.7 trillion won in 2022-2023 from 7.4 trillion won last year.

SK ECOPLANT’S ENDLESS EXPANSION

SK Ecoplant Co. is under similar pressure. The group’s construction unit acquired Singapore-based electronic waste (e-waste) disposal and recycling company TES Envirocorp Pte. Ltd for $1 billion last month, expanding its waste treatment services beyond incineration and landfill.

The takeover came three months after SK Ecoplant, formerly known as SK Engineering & Construction, decided to invest a total of 459.5 billion won in Samkang M&T Co., a South Korean wind farm substructure maker. Before the move, SK Ecoplant purchased waste treatment firms for eco-friendly businesses.

The company’s financial structure was worse than SK E&S with a debt ratio of 339.9% as of the end of September 2021. SK Ecoplant has been trying to improve the capital base by selling its plant construction business to PEFs for 450 billion won. It is also seeking to raise 600 billion won through a pre-IPO.

For the TES acquisition, SK Ecoplant invited IMM Private Equity as a financial investor, but the builder still needs to spend significantly although it will have to wait to make money from the takeover.

“Considering TES’ profit and cash generation, it will take time to recover investment capital (from the deal), just like existing environmental business investment,” said South Korea’s NICE Investors Service. “At this point, an additional financial burden is a factor to weigh on creditworthiness,” the ratings agency said.

The company could improve its financial structure through the participation of PEFs, but that is not free. It will have to guarantee profits for financial investors by measures such as share buybacks.

KKR has a priority to receive annual dividends of 3.99% from SK E&S for the US PEF’s acquisition of the redeemable convertible preferred shares.

Write to Hyun-Il Lee at hiuneal@hankyung.com
Jongwoo Cheon edited this article.