Financial Crisis Originating in Aviation Industry... Domino Effect Extends to Refining Industry

[Asia Economy reporters Park So-yeon and Yoo Je-hoon] There is a growing call to actively implement effective measures such as liquidity support for Korea's flagship companies facing survival crises due to the global economic downturn caused by the spread of the novel coronavirus infection (COVID-19). This is because many large corporations, like Doosan Heavy Industries & Construction, are under cash pressure. The most urgent sectors are the refining and aviation industries. The accumulated deterioration in performance combined with the COVID-19 shock has slowed cash flow and increased interest burdens.

According to financial information firm FnGuide on the 27th, SK Innovation's consensus for the first quarter performance this year forecasts an operating loss of 205.7 billion KRW, signaling a return to the red. The worst-case scenario predicts SK Innovation's first-quarter operating loss could reach as high as 1.0876 trillion KRW. S-Oil's first-quarter market outlook also expects an operating loss of 144.4 billion KRW, indicating a deficit. The first-quarter operating profit forecasts for SK Innovation and S-Oil have been revised downward by more than 70% compared to a month ago. Their stock prices have also fallen sharply following the plunge in crude oil prices.

GS Caltex's international credit rating has been downgraded. Global credit rating agency S&P forecasted a significant decline in GS Caltex's profitability this year and lowered its long-term credit rating from 'BBB+' to 'BBB'. Hyundai Oilbank has entered an emergency management system, with all executives including President Kang Dal-ho voluntarily returning 20% of their salaries and cutting expense budgets by up to 70%.

Recently, the refining industry has been pushed to a point where it is difficult to bear massive interest payments. This is because cash on hand has sharply decreased due to the steep drop in international oil prices. In the third week of March, the composite refining margin fell to minus 1.9 dollars per barrel, meaning operating the plants results in losses. As the entire world falls under the influence of COVID-19, demand for refining has also plummeted due to reduced cargo volumes.

In particular, refiners have seen their interest burdens increase amid sharply reduced profits caused by the drop in international oil prices. According to electronic disclosures by the Financial Supervisory Service, as of the third quarter of last year, SK Innovation, GS Caltex, Hyundai Oilbank, and S-Oil held cash and cash equivalents of 187 billion KRW, 907 billion KRW, 21.1 billion KRW, and 928.2 billion KRW respectively, totaling 2.0433 trillion KRW. In contrast, their financial costs during the same period were 252.4 billion KRW, 104.3 billion KRW, 181.2 billion KRW, and 383.4 billion KRW respectively, totaling 921.3 billion KRW. When annualized, this is expected to exceed 1 trillion KRW. This entire cost is interest. More than 50% of cash assets are going out as interest debt.

A refining industry insider said, "We are under tremendous financial pressure as we have to pay huge petroleum import surcharges and crude oil tariffs, along with massive interest payments," adding, "We are on edge because the cash flow of trading partners such as airlines, which have been directly hit by COVID-19, is rapidly deteriorating, potentially causing a domino effect."

The aviation industry is also surviving on life support. Korean Air, a major full-service carrier (FSC), recently confirmed the issuance of 622.8 billion KRW worth of accounts receivable asset-backed securities (ABS), which helped extinguish urgent fires such as repaying 240 billion KRW in corporate bonds maturing next month. The problem lies ahead. Korean Air has about 4 trillion KRW in borrowings that must be repaid or refinanced within this year. The 622.8 billion KRW ABS is far from sufficient.

On the other hand, raising funds is becoming increasingly difficult. Domestic credit rating agencies have placed Korean Air's corporate bond rating (BBB+) under review for downgrade. Issuing ABS is also not easy. Due to the COVID-19 crisis, passenger flights have decreased by more than 80%, making it difficult to issue ABS based on accounts receivable. There are also concerns that early redemption triggers could be activated depending on reservation rates or credit rating changes for already issued ABS.

A Korean Air official said, "Currently, raising funds through corporate bonds or accounts receivable ABS issuance is becoming increasingly difficult. The fact that major foreign countries have promised priority support for the aviation industry is in this context," adding, "If the situation prolongs, it will be difficult to survive without government or policy bank guarantees or financial support."

This content was produced with the assistance of AI translation services.