Reuters: Financial Services and Real Estate: TEXT-Fitch:No immediate rating impact on SKI from Incheon investment

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TEXT-Fitch:No immediate rating impact on SKI from Incheon investment May 2nd 2012, 07:23 Wed May 2, 2012 3:23am EDT (The following statement was released by the rating agency) May 02 - Fitch Ratings says that SK Innovation's (SKI, 'BBB'/Stable) ratings are not immediately affected by its KRW1.6trn investment in Incheon Complex, formerly known as Incheon Oil Refiner Co. Although the funding structure for the project has not yet been confirmed, SKI is likely to involve strategic investors to reduce its funding commitment to the project. SKI, however, will retain majority ownership of Inchoen Complex. As the bulk of the investment will take place only in 2013 and 2014, Fitch believes SKI will have time to finalise any arrangements with strategic investors. Rating headroom for SKI will reduce with the additional capex for the next three years. However, Fitch believes that SKI will manage the impact on its credit metrics by reducing the cash outlay on this project via the involvement of strategic investors. The company had KRW4.35trn of cash reserves (as at end-December 2011) including its Brazilian asset divestments in 2011, which are not earmarked for any specific investments. Fitch's negative rating guidance for SKI's current rating is an increase in investment or downturn in operating cash generation resulting in funds from operations (FFO)-adjusted net leverage rising above 3x on a sustained basis. SKI's FFO-adjusted net leverage was 1.44x in 2011. Although Fitch expects this ratio to weaken in the short-term due to softening refinery margins, it is likely to be maintained within the above negative rating guideline. On 30 April 2012, SKI announced that it will upgrade the existing Inchoen Refinery Complex to an aromatic-focused refinery with a capacity of 1.3million tonnes of PX (Paraxylene) per year, instead of the construction of a hydro cracking centre which it postponed in 2009 due to the global economic crisis. The company will add a condensate splitter, a reformer and PX manufacturing facilities. Incheon Complex currently has two crude units, with a total crude refining capacity of 275,000 barrels per day (bpd) and has been running at less than 50% of capacity. With the proposed expansion, SKI is looking for additional operating profits of around KRW500bn per year from the asset once production is ramped-up. The company expects the project to be completed by end-2014. Link this Share this Digg this Email Reprints

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