“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 numbers 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>

[E-Daily Marketin Reporter LEE GEON-EOM ] Despite a marked improvement in earnings during the first half of this year, SK Inc. ( SK(034730)), the holding company of the SK Group, has been unable to reduce its consolidated debt burden, which exceeds 72 trillion won. Analysts note that due to dividend payments and working capital requirements, the company’s actual available cash is limited, leaving it with insufficient capacity to reduce its debt.

According to the financial investment industry on the 28th, SK Inc. will conduct a bookbuilding process on the 29th to issue 150 billion won in unsecured corporate bonds. The issuance consists of 100 billion won in 3-year bonds and 50 billion won in 5-year bonds. SK Inc. plans to consider increasing the issuance amount to a maximum of 250 billion won depending on the results of the bookbuilding process.

Korea Ratings Corporation(034950)On the 22nd, [Rating Agency] assigned an AA+ (Stable) credit rating to SK Inc.’s unsecured corporate bonds. A “Stable” outlook indicates a low likelihood of a rating change within the next one to two years. Market participants are increasingly confident that the company will secure solid institutional demand, based on its strong external credibility and recent recovery in earnings. However, analysts note that the scale of debt accumulated due to the group’s aggressive investments and the burden of refinancing remain key considerations.

SK Inc.’s profitability has shown a marked recovery. Consolidated revenue for the first half of this year reached 78.9549 trillion won, a 29.1% increase compared to the same period last year. Operating profit more than tripled during the same period, rising from 636.7 billion won to 8.5144 trillion won. The operating profit margin also jumped from 1% to 10.8%.

Cash flow metrics have also improved. Cash flow from operating activities reached 4.6076 trillion won, a 67.0% increase compared to the same period last year (2.7593 trillion won). Free cash flow (FCF), calculated after deducting acquisitions of tangible and intangible assets, turned from a deficit of 2.3073 trillion won in the first half of last year to a surplus of 874.8 billion won this year.

The problem is that this earnings rebound has not led to a reduction in debt. Analysts note that, despite the improvement in operating performance, actual available cash flow remains tight, preventing the company from reducing its debt burden.

In fact, SK Inc.’s total debt remained at 72.2118 trillion won, a level similar to the 72.2008 trillion won recorded at the end of last year. Cash and cash equivalents decreased from 25.2141 trillion won to 23.8386 trillion won. Consequently, net debt increased by 1.3865 trillion won, rising from 46.9866 trillion won to 48.3732 trillion won.

Of course, debt-related metrics have improved. The debt-to-equity ratio fell from 33.8% at the end of last year to 29.5% at the end of June this year. The net debt-to-equity ratio also declined from 54.8% to 41.1%. However, some point out that there is significant concern given that the sheer scale of the debt itself remains astronomical. SK Inc. paid 1.3446 trillion won in interest alone during the first half of the year.

Although free cash flow (FCF) returned to a surplus in the first half, it shows a deficit of 237.8 billion won when consolidated dividend payments—including dividends to minority shareholders of subsidiaries (1.1127 trillion won)—are factored in. This structure leaves no room to reduce debt, as cash generated from operations is drained by dividend payments.

Working capital burdens also constrained cash flow. As accounts receivable and inventory increased, net working capital rose by 5.379 trillion won, from 13.6906 trillion won at the end of last year to 19.0696 trillion won. Korea Ratings also noted that the net debt of SK Innovation, a key subsidiary, had increased at the end of the half-year compared to the end of the previous year due to higher working capital investments.

The financial burden on the holding company alone has decreased. According to HanKiPyeong, SK Inc.’s net debt on a standalone basis decreased from 10.526 trillion won at the end of 2024 to 8.52 trillion won at the end of June this year. This is due to the cash inflow from the sale of stakes in SK Specialty and SK BIOPHARMACEUTICALS. On the other hand, on a consolidated basis—which includes the debt of subsidiaries—there has been no change in the total debt level.

The maturity structure is also a source of concern. Short-term debt with maturities of less than one year totaled 28.2412 trillion won, an increase of 1.5864 trillion won compared to the end of last year. Their share of total debt also rose from 36.9% to 39.1%. During the same period, cash and cash equivalents decreased, causing the ratio of cash and cash equivalents to short-term debt to fall from 94.6% to 84.4%. This suggests that the company’s cash reserves alone are insufficient to cover all short-term maturities, making it inevitable that reliance on refinancing will increase.

Yoo Jun-wi, a senior researcher at Korea Ratings Corporation, analyzed, “We expect the company to control its debt burden to a certain extent through the robust profit-generating capacity of its core subsidiaries and its ability to secure internal investment funds, such as through the sale of minority stakes in subsidiaries and investment assets.” However, he added, “Investment burdens associated with strengthening the new business portfolio and the potential for increased cash outflows due to a strengthened shareholder return policy could act as burdens on financial leverage.”

He continued, “A cash-generating structure heavily reliant on the semiconductor sector and the weakening of inter-affiliate cohesion due to amendments to the Commercial Act could constrain the group’s credit management,” adding, “We plan to monitor whether the group can control financial burdens across its various portfolios.”