“Credit Checkpoint” is a column that assesses the credit rating risks of companies preparing to issue corporate bonds by examining their financial structure and cash flow. It evaluates a company’s short- and medium-term financial stability by focusing not only on the figures in the financial statements but also on the quality and sustainability of its cash flow. We highlight key financial indicators and potential risk factors to help corporate bond investors and market participants assess a company’s creditworthiness from a more comprehensive perspective. <Editor’s Note>

[Edaily Marketin Reporter LEE GEON-EOM ] General construction firm #SK Eco Plant is entering the public bond market, backed by improved earnings driven by the semiconductor boom. Given its unusually strong performance in the corporate bond market during the first half of the year—a rare feat for a construction company—expectations are high for strong buying interest. However, amid growing uncertainty in the corporate bond market for the second half of the year—including interest rate hikes—excessive contingent liabilities from project financing (PF) and increased net debt are seen as challenges that must be overcome to win over investors.

According to the financial investment industry on the 21st, SK Eco Plant will conduct a bookbuilding process on the 22nd for unsecured corporate bonds totaling 100 billion won. Depending on the results, the company plans to increase the issuance amount to a maximum of 200 billion won. The maturities are structured as follows: 50 billion won for 1-year bonds, 30 billion won for 1.5-year bonds, and 20 billion won for 2-year bonds.

Effects of Semiconductor Portfolio Restructuring… Improved Profitability

SK Eco Plant has recently shifted its portfolio toward semiconductors and artificial intelligence (AI) data centers, achieving a marked rebound in earnings. First-quarter revenue this year reached 4.8997 trillion won, a 99.3% increase compared to the same period last year. Operating profit reached 931.4 billion won, a 1,261.7% increase compared to the same period last year. This result stems from a combination of expanded semiconductor construction orders from SK Hynix and the consolidation of earnings from high-performing subsidiaries such as Essencore.

The strong performance led to improvements in key financial indicators. As of the end of the first quarter of this year, SK Eco Plant’s debt-to-equity ratio stood at 176.2%, down 15.8 percentage points (p) from the end of last year (192.0%). The debt dependency ratio also stood at 29.1%, down 1 percentage point from the end of the previous year. The company has now met both of the credit rating agencies’ recommended guidelines: a debt-to-equity ratio of 200% or less and a debt dependency ratio of 30% or less.

Although SK EcoPlant has succeeded in partially improving its financial soundness, the prevailing view is that financial uncertainty remains. This is because delays in collecting accounts receivable at various business sites have increased working capital burdens, leading to a slowdown in cash flow. SK EcoPlant recorded a net outflow of 236.7 billion won in cash flow from operating activities for the first quarter of this year. Free cash flow (FCF) also continued to show a deficit of 386.9 billion won. Cash outflows resulting from investments in operating activities have increased the company’s financial burden.

As a result, despite reducing the total amount of debt, the actual debt burden actually increased. This is because the decline in cash on hand far exceeded the reduction in debt. As of the end of the first quarter, SK Eco Plant’s cash and cash equivalents stood at 1.8099 trillion won, a 38.4% decrease from the end of the previous year. Total debt stood at 5.1987 trillion won, down 4.1% from the end of the previous year. However, as cash on hand declined at a steeper rate, net debt rose 36.7% year-over-year to 3.3888 trillion won.

The risk of contingent liabilities from project financing (PF) in the construction sector is also exerting downward pressure on the company’s creditworthiness. As of the end of the first quarter of this year, SK Eco Plant’s outstanding PF-guaranteed loan balance reached 1.8984 trillion won. This includes bridge loans and agreements to replenish funds for the main PF for large-scale projects such as the residential complex in Bonri-dong, Daegu (600 billion won) and the office complex in Haeundae, Busan (258.4 billion won).

‘Uncertainties’ Amid a Tight Market

Given these circumstances, analysts say it is difficult to guarantee that SK Eco Plant will be able to successfully issue corporate bonds on favorable terms, as it did in the first half of the year. In particular, they note that the overall decline in investor sentiment in the corporate bond market—driven by factors such as interest rate hikes—is an additional burden.

Previously, on the 16th, the Bank of Korea’s Monetary Policy Committee raised the benchmark interest rate by 25 basis points (1 bp = 0.01 percentage point) from 2.50% to 2.75% annually. Market uncertainty has further increased after Bank of Korea Governor Shin Hyun-song hinted at additional hikes, stating, “As the inflation rate is expected to exceed the target level for a considerable period, it is necessary to continue the trend of raising the benchmark interest rate.”

In fact, the size of the funding market is shrinking. In the first half of this year, the total issuance of domestic corporate bonds (public and private placements combined) amounted to 46.6594 trillion won, a 17.4% decrease compared to the same period last year (56.4950 trillion won). Notably, net issuance—calculated by subtracting redemptions from total issuance—recorded a negative (-) 4.9287 trillion won. This means that companies repaid more than they raised in new funds.

Jang Su-myeong, a senior researcher at Korea Credit Rating, noted, “Operating cash flow generation has been further strengthened thanks to portfolio restructuring centered on semiconductor-related businesses and an expansion in orders from affiliated construction companies,” but added, “Increased working capital burdens, along with the risk of contingent liabilities from project financing (PF) centered on non-residential projects, are contributing to financial uncertainty.”

He added, “Going forward, the key factors for monitoring creditworthiness will be whether the company’s enhanced profit-generating capacity and the proceeds from the sale of non-core assets can stably manage the remaining burden of contingent liabilities from project financing.”

Meanwhile, SK Eco Plant received a total of 1.021 trillion won in orders during the corporate bond bookbuilding conducted last February. Initially, SK Eco Plant had set a fundraising target of 150 billion won, comprising 30 billion won in 1-year bonds, 50 billion won in 1.5-year bonds, and 70 billion won in 2-year bonds. The interest rate terms were set at minus (-) 30 basis points for the 1-year bond, minus (-) 53 basis points for the 1.5-year bond, and minus (-) 36 basis points for the 2-year bond. The offering was a success, with rates across all maturities falling below the benchmark interest rate.