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SK Innovation Co. Ltd. Upgraded To #BBB+# On Prudent Financial Policy And Solid Operating Cash Outlook Stable

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HONG KONG--24 Jan--S&P Global Ratings

HONG KONG (S&P Global Ratings) Jan. 24, 2017--S&P Global Ratings said today it raised its long-term corporate credit rating on SK Innovation Co. Ltd. to 'BBB+' from 'BBB'. The outlook is stable. At the same time, we raised the issue rating on the company's outstanding senior unsecured notes to 'BBB+' from 'BBB'. SK Innovation is a Korea-based refining and petrochemical producer.

"We upgraded SK Innovation to reflect our expectation that the company is likely to maintain a prudent financial policy and solid operating cash flow over the next 12-24 months, as reflected in solid credit metrics. We estimate that the company will maintain an adjusted ratio of debt to EBITDA at around 1x during this period," said S&P Global Ratings credit analyst Minjib Kim.

SK Innovation is likely to maintain a prudent financial policy without increasing its debt level significantly over the next 12-24 months, in our view. But we also anticipate an increase in dividends and investments, such as investments for geographical diversification in its core businesses. We expect the company to be able to fund a large portion of increasing investments of Korean won (KRW) 2.5 trillion-KRW3.0 trillion annually in 2017-2018 from less than KRW1 trillion annually in 2015-2016. That's in addition to some increase in dividends during the period through solid operating cash flow generation.

Also, we believe the company has the flexibility to manage investments and dividends depending on operating cash flow, as shown when it stopped paying dividends and reduced investments substantially over 2015-2016.

We expect SK Innovation's much lower debt level to make its credit metrics less vulnerable to volatility in the oil refining and petrochemical industries. The company's debt level substantially declined to around KRW3 trillion as of the end of 2016 from more than KRW9 trillion as of the end of 2014, due to robust operating performances and low investments from oil refining and petrochemical business.

We expect SK Innovation to continue to generate solid operating cash flows over the next 12-24 months despite our expectations for some normalization of margins from peak-of-the-cycle levels in 2015-2016. We base this on our expectation of a reduced swing in the oil prices and the demand-supply balance in the regional refining and petrochemical industries. In our view, the industries' margins are likely to remain stable in Asia-Pacific, given the

likelihood of sustained demand, moderate capacity additions, and lower oil prices than in the past. In our view, these factors encourage demand but discourage capacity additions, even though the oil price has been recently trending upward.

Based on the above factors, we have revised the financial risk profile on SK Innovation to modest from intermediate. The stable outlook reflects our expectation that SK Innovation is likely to maintain a ratio of debt to EBITDA of around 1x over the next 12-24 months. We base our expectation on the company's reduced vulnerability to industry volatility, given its prudent financial policy as indicated by a much lower debt level. We also base our expectation on SK Innovation's solid operating cash flow, given fewer swings in oil prices and a stable refining and petrochemical demand and supply balance.

We may lower the ratings if SK Innovation's adjusted debt-to-EBITDA ratio approaches 1.5x on a sustained basis. This may be a result from significant deterioration in operating cash flow as a result of weaker refining and petrochemical margins than we expect and higher swings in the oil price. This also may be a result of the company's financial policy becoming more aggressive in terms of significantly increasing investments and dividends.

We see limited upside potential over the next 12-24 months, mainly because of inherent volatility in the industry and SK Innovation's increasing investments and dividends. Despite this, we may raise the rating if the company substantially increases its scale and diversifies its business portfolio, resulting in significantly reduced volatility in its operations, while it maintains a low debt level.


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