SK E&S, Breathless 5 Trillion Fundraising... Increased Financial Burden in Preparing for Merger

Full Mobilization of Financial Company Loans, Short-term Private Bonds, and CP Issuance
Funds Injected into RCPS Settlement and Corporate Bond Buyback
Merging Preparations Completed... No Increase in Borrowings
Concerns Over Financial Burden Due to Sharp Rise in Short-term Borrowings

SK E&S, preparing for a merger with SK Innovation, raised 5 trillion won in funds all at once in October alone. It mobilized various financing methods including short-term private bonds (2.8 trillion won), loans from financial companies (2 trillion won), and commercial paper (CP, 250 billion won) issuance. Most of the raised funds were primarily used to repay the principal and interest of investments from convertible redeemable preferred shares (RCPS) and corporate bond investors. Concerns have emerged that the rapid increase in short-term borrowings during the merger preparation could pose a financial burden on the merged entity.

President Park Sang-gyu announcing the merger of SK Innovation and SK E&S Photo by Yonhap News

According to the investment banking (IB) industry on the 22nd, SK E&S recently raised over 5 trillion won in the capital market. On the 15th, it secured a syndicated loan worth 2 trillion won from several financial companies, including securities firms. The loan maturity is 1 to 2 years, and it is a revolving credit line allowing funds to be drawn within the limit. Subsequently, on the 17th, it issued short-term private bonds worth 2.8 trillion won. The maturity is one week, and the bond interest rate is 3.90% per annum. On the 4th, it also issued 250 billion won worth of 3-month maturity CP. As a result, SK E&S’s CP balance increased from the existing 300 billion won to 550 billion won.

SK E&S mainly used most of the raised funds to resolve investor issues opposing the merger. It settled approximately 3 trillion won of RCPS investment funds with the global private equity firm Kohlberg Kravis Roberts (KKR). It also injected about 2 trillion won to buy back previously issued corporate bonds before maturity.

SK E&S had previously issued large-scale RCPS to KKR. In November 2021, it issued 2.4 trillion won, and in January and October last year, it issued 367.5 billion won each, totaling 3.135 trillion won. It is reported that SK E&S agreed to settle KKR’s RCPS investment funds on the condition that KKR supports the merger and to reissue RCPS under similar terms through its city gas subsidiaries.

Accordingly, SK E&S used about 3 trillion won to prioritize repaying RCPS by issuing approximately 2.8 trillion won worth of short-term private bonds. These short-term private bonds will be repaid by the city gas subsidiaries reissuing RCPS. SK E&S plans to establish two new entities, E&S City Gas and E&S City Gas Busan, as intermediate holding companies under E&S City Gas, which has seven city gas affiliates including Gangwon City Gas, to reissue RCPS under terms similar to those previously issued. The city gas subsidiaries will issue RCPS to raise funds, which SK E&S will borrow again and use to repay the short-term private bonds.

The 2 trillion won borrowed from financial companies was used to buy back existing corporate bonds. Buyback refers to repurchasing corporate bonds before their maturity. An IB industry insider said, "During mergers or spin-offs, credit ratings may negatively change, causing existing bondholders to oppose. In such cases, companies often buy back corporate bonds at the bondholders’ request."

SK E&S maintains that it used over 5 trillion won to resolve existing debts and that this does not lead to an increase in borrowings. A SK E&S official explained, "The ultra-short-term private bonds with a one-week maturity are repaid with funds from reissued RCPS, and the remaining borrowings are used for existing corporate bond buybacks, so borrowings do not effectively increase."

However, related industries expect that the rapid increase in short-term borrowings during the merger preparation will act as a financial burden on the merged corporation. An IB industry insider said, "A significant portion of the 5 trillion won borrowed all at once in October corresponds to short-term borrowings with maturities of less than one year. The RCPS remains unchanged, and short-term borrowings such as the 2 trillion won syndicated loan increase, which, along with SK Innovation’s existing debts and additional borrowings to support SK On after the merger, will act as a financial burden."

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