SK, SK E&S Continue 10% Stake TRS Contract Until 2027

SK E&S Maintains Indirect Ownership of Shares Through Paid-in Capital Increase
TRS Contracts with SK Siltron, SK Shipping, etc. for Corporate Governance Restructuring and Other Purposes

SK Group's holding company SK is expected to extend the total return swap (TRS) contract for its 10% stake (4,641,999 shares) in SK E&S with financial companies until 2027. As the initial public offering (IPO) of SK E&S continues to be delayed, SK remains in a situation where it indirectly holds the shares it participated in during SK E&S's paid-in capital increase. Accordingly, all TRS contracts related to SK Group, including SK Siltron and SK Shipping, have been extended until 2027.

SK headquarters in Seorin-dong, Seoul.

SK E&S Share Collateral TRS Contract Maturity Extended to 2027

According to the investment banking (IB) industry on the 19th, SK Group recently changed the TRS securitization structure of special purpose companies (SPCs) ‘MD Prime First’ and ‘MD Prime Second,’ which hold a 10% stake in SK E&S. The lending syndicate, composed of financial institutions, issued asset-backed loans (ABL) and asset-backed short-term bonds (ABSTB) using SK E&S shares and the TRS contracts with SK as collateral, raising a total of 678.8 billion KRW.

The funds raised were used to repay maturing asset-backed commercial papers (ABCP) and others. The ABL lending syndicate reportedly includes Shinhan Bank, Woori Bank, and NongHyup Bank. The maturity of the loans (ABL) and the re-established TRS contracts is November 2027. This confirms that SK extended the TRS contract it signed with Mirae Asset Securities in 2017 for another five years last November.

In 2017, SK transferred a 10% stake in SK E&S to an SPC established by Mirae Asset Daewoo through a third-party allotment paid-in capital increase, raising approximately 677.8 billion KRW. They signed a TRS contract under which SK would repurchase the shares at the same price five years later (November 2022). If the value of SK E&S shares exceeds 677.9 billion KRW at maturity, SK benefits; if it falls below the reference price, SK compensates Mirae Asset Securities for the loss. Mirae Asset Securities was guaranteed the principal and regularly received TRS premiums, equivalent to interest, from SK.

At the time of the TRS contract, SK E&S's corporate value was evaluated at 6.7778 trillion KRW. At that time, the investment market pointed out that the corporate value was excessively overvalued considering SK E&S's profit scale and financial condition. The dominant view was that an appropriate value was around 3 to 4 trillion KRW, slightly exceeding the book value of 2.6 trillion KRW.

However, SK E&S's performance has recently improved rapidly, and its corporate value is considered to have significantly increased. Sales, which were around 5.5 trillion KRW in 2017, exceeded 11 trillion KRW last year, and annual operating profit, which was below 400 billion KRW, surpassed 1.4 trillion KRW last year. SK Group has announced plans to raise liquefied natural gas (LNG) business sales to the 14 trillion KRW level by 2025, making it a core group business.

An IB industry official assessed, "As SK E&S's corporate value rises rapidly, the loss burden that must be settled with the SPC holding SK E&S shares has significantly decreased." However, the official added, "SK E&S raised funds by issuing 2.4 trillion KRW worth of redeemable convertible preferred shares (RCPS) to the global private equity firm Kohlberg Kravis Roberts (KKR) in 2021," and analyzed, "If the RCPS converts into common shares and a large number of new shares are issued, the per-share value of SK E&S could be significantly diluted."

SK Siltron and SK Shipping TRS Contracts Also Extended

SK Group and Chairman Chey Tae-won signed TRS contracts on shares of several affiliates in 2017. A representative case is SK Siltron (formerly LG Siltron) shares. When SK acquired SK Siltron, Chairman Chey and Korea Investment & Securities signed a TRS contract on 29.4% of the shares. The TRS contract for SK Siltron shares was extended by five years last August. Although the Fair Trade Commission ruled the TRS contract of Chairman Chey illegal and imposed fines and other measures, SK has been contesting this through administrative litigation, which continues to this day.

SK also extended the maturity of the TRS contract related to SK Shipping shares last year. The contract was made when SK transferred 4,805,295 common shares of SK Shipping (approximately 18% stake) to an SPC established by Samsung Securities. At that time, SK Shipping physically split its shipping business into the surviving company SK Maritime and the newly established SK Shipping. The dedicated vessel and bunkering businesses went to SK Shipping, while non-performing assets went to SK Maritime. Under the contract terms, SK committed to listing SK Shipping by 2022. The sale price of SK Shipping shares was 163 billion KRW, and SK held a call option (early repurchase right before maturity) to buy back the shares. The TRS contract was reportedly extended last year under conditions similar to the original contract.

An IB industry official said, "SK Group has extensively used TRS contracts to reduce direct financial burdens during the 2017 governance restructuring and other processes," adding, "As the listings of affiliates with TRS contracts have been delayed, the TRS contracts continue to be extended."

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