SK Innovation's Credit Rating Downgrade Spiral... Battery Division Faces KRW 1 Trillion Loss Concerns This Year

◇ Moody's Downgrades Credit Rating to Ba1, Below Investment Grade
◇ Debt Ratio at 177%; E&S Merger "Insufficient for Battery Profitability Improvement"
◇ Domestic Credit Rating Also at Risk of Downgrade

[Korea Financial Times, Gwak Horyung] SK Innovation's battery business struggles are leading to a vicious cycle, with credit rating downgrades increasing the burden of raising investment funds.

On March 14 (local time), global credit rating agency Moody's downgraded SK Innovation's credit rating from 'Baa3' to 'Ba1'. Baa3 was the lowest investment-grade rating, and this adjustment signifies a downgrade to below investment grade. Moody's cited "continued underperformance in the battery sector (SK On) and high debt burden" as reasons.

SK Innovation's financial burden has increased dramatically since 2020, largely due to increased borrowing for battery investments. The company's debt ratio has been on an upward trend: 87% in 2018, 149% in 2020, 189% in 2022, and 177% in 2024. Although it decreased slightly last year due to the merger with SK E&S, it remains at a level requiring management compared to other energy and battery companies maintaining ratios around 100%.

A greater concern is the uncertain short-term outlook for the battery sector. SK On reported an operating loss of KRW 1.127 trillion last year due to the electric vehicle chasm effect. Securities firms forecast a similar loss of around KRW 1 trillion this year, with no significant signs of recovery.

The poor profitability of the battery business could also negatively impact domestic credit ratings. Korea Ratings currently maintains SK Innovation's credit rating at AA (stable). One of the factors for a credit rating downgrade is "if the ratio of net borrowings to EBITDA (earnings before interest, taxes, depreciation, and amortization) consistently exceeds 7 times".

According to SK Innovation's IR materials, as of the end of last year, the company's net borrowings were KRW 27.5266 trillion, with an EBITDA of KRW 276.4 billion. The net borrowings to EBITDA ratio stands at 10.3 times, meeting the criteria for a credit rating downgrade.

Gwak Horyung (horr@fntimes.com)