MOSCOW (MRC) -- Oil’s plunge into a bear market and a petroleum-product glut is dragging South Korea’s largest refiner toward junk status and raising industry borrowing costs, said Bloomberg.
There’s a 0.98 percent chance SK Innovation Co. will fail to pay its debts in the coming year, up from 0.13 percent on June 30, according to Bloomberg’s default-risk model that takes into account a company’s finances and stock moves. That suggests it merits a non-investment debt rating. The premium on GS Caltex Corp.’s 2019 dollar bonds jumped 36 basis points to a record this quarter, compared with a 7 basis point average rise for Korean dollar debt, JPMorgan Chase & Co. indexes show.
Moody’s Investors Service cut SK Innovation’s rating to Baa3, the lowest investment-grade on Dec. 3, while Standard & Poor’s changed the outlook on GS Caltex and S-Oil Corp. (010950) to negative from stable Dec. 1. That may raise borrowing costs for the refiners, which face 2 trillion won (USD1.8 billion) in repayments next year, data compiled by Bloomberg show.
Korean oil refiners are in a more difficult position than their Chinese peers because they lack a major domestic market, S&P said. Exports accounted for 60 percent of their production, according to Korea Investors Service. South Korea’s November exports of petroleum products fell 21.6 percent from a year earlier, the most among commodity groups, according to the trade ministry. That compares with a 1.9 percent drop for total exports.
Korean oil refiners will probably maintain their investment-grade rating status at least for 2015 if oil prices don’t weaken further because earnings are expected to be weak, but stable, in 2015, said Wee Lee Cheng, a Singapore-based credit analyst at ING Investment Management Asia Pacific Ltd.
Overcapacity in the petrochemical industry will stretch into next year, however refining margins are likely to be stable in 2015, barring any further material declines in oil, he said.
Petrochemical margins, used to offset losses on oil refining, are under pressure as well, said Park Jin Young, a credit analyst at Woori Investment & Securities Co. in Seoul.
As MRC wrote before, SK Innovation Co. will end a battery-pack joint venture with German partner Continental AG due to slow growth in demand for electric cars. SK Innovation and Continental, Europe's second-largest car parts maker, established a joint venture in January 2013 to develop and produce lithium-ion battery systems for vehicles. Although the companies agreed to invest 270 million euros (US$336 million) over five years, they are ending the partnership early due to weak market demand for battery-powered vehicles amid limited infrastructure and falling oil prices.
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