[Funding] IMM PE Completes Financing to Acquire 40% Stake in SK Lubricants

Including 585 Billion KRW Senior Acquisition Financing Secured by Equity
Acquisition Payment of 1.1~1.2 Trillion KRW Completed
SK Innovation Sees Partial Financial Improvement Effects

[Asia Economy Reporter Lim Jeong-su] Domestic native private equity firm IMM PE has raised funds amounting to 1.1 trillion to 1.2 trillion KRW to purchase shares of SK Lubricants. Accordingly, IMM PE completed the payment to SK Innovation and secured the position of the second-largest shareholder of SK Lubricants. SK Innovation was able to partially improve its deteriorated financial structure with the inflow of proceeds from the share sale.

According to the investment banking (IB) industry on the 1st, IMM PE’s newly established subsidiary IMM Credit Solution (hereafter IMM) recently raised 585 billion KRW from a lending consortium including Shinhan Bank through Ecosolution Holdings Co., Ltd., which was created to acquire shares of SK Lubricants. The loan maturity is 5 years with a bullet repayment condition at maturity.

IMM provided SK Lubricants shares as collateral during the fundraising process. The lending consortium providing acquisition financing was allowed to establish a first-priority pledge on SK Lubricants shares. IMM thus raised about 53% (LTV) of the total 1.1 trillion KRW share purchase funds through senior (first-priority) acquisition financing.

The remaining approximately 520 billion KRW was reportedly raised through mezzanine (subordinated) and equity (junior) financing. IMM agreed to acquire 40% of SK Lubricants shares held by SK Innovation and has been recruiting investors for senior acquisition financing until recently.

IMM valued SK Lubricants at 3.3 trillion KRW when purchasing the shares. Although the estimated value of the acquired shares exceeds 1.3 trillion KRW, the share price was discounted to 1.1 trillion KRW considering somewhat excessive debt burdens such as borrowings.

IMM is expected to pursue share sales (Exit) through SK Lubricants’ initial public offering (IPO) in the future. SK Lubricants previously attempted to go public three times but failed to enter the stock market due to poor demand forecasts. SK Innovation reportedly sold its shares in SK Lubricants on the premise of pursuing a listing within a few years.

SK Lubricants, a subsidiary of SK Innovation, manufactures and sells base oils and lubricants. It has maintained the global number one position in the premium base oil sector for 20 years. Recently, it has been leading the related market by consecutively launching lubricant products optimized for electric vehicles. However, its performance and financial structure have deteriorated recently due to COVID-19 and other factors.

SK Innovation, which sold the shares, was able to partially improve its deteriorated financial structure by receiving the sale proceeds. SK Innovation recorded a massive operating loss of 2.6 trillion KRW on a consolidated basis due to the sharp drop in oil prices and refining margin deterioration caused by COVID-19.

Due to worsening performance, net borrowings, which were around 1.3 trillion KRW in 2017, have significantly deteriorated financial stability as large cash flow deficits of 1 to 2 trillion KRW per year continued, exceeding 10 trillion KRW in the first quarter of this year. Consequently, its credit rating also showed a downward trend.

An IB industry official evaluated, "Although SK Innovation partially improved its financial structure by selling shares of SK Lubricants, one of its core subsidiaries, it still faces significant financial burdens. Additional financial improvement efforts seem necessary."