 |
Photo courtesy of Yonhap News |
[Alpha Biz= Kim Jisun] SK Innovation has recorded significant valuation losses of nearly KRW 600 billion related to equity return swap (PRS) contracts backed by shares of its battery subsidiary SK On, highlighting growing derivative-related risks among Korean corporates.
According to regulatory filings on April 5, SK Innovation disclosed derivative liabilities of KRW 581.4 billion tied to PRS contracts based on SK On shares in its latest annual report. The company entered into PRS agreements totaling KRW 3.5 trillion—KRW 1.5 trillion in 2024 and KRW 2 trillion last year.
While SK Innovation had previously recognized valuation gains of KRW 88 billion in 2024, it booked substantial valuation losses the following year, increasing potential liabilities by more than KRW 600 billion.
PRS (price return swap) is a derivative product in which companies sell shares—often in subsidiaries—to investors such as securities firms, while retaining exposure to stock price movements. If the underlying share price falls below the agreed level at settlement, the company must compensate investors for the difference; if it rises, the company can capture additional gains.
The losses were driven by a decline in the fair value of SK On, which, despite being unlisted, is subject to valuation adjustments. SK On posted significant losses last year, contributing to the sharp increase in derivative liabilities.
In an effort to strengthen its financial structure, SK On merged with SK Enmove (formerly SK Lubricants), a profitable lubricants business that generated approximately KRW 5 trillion in revenue and nearly KRW 1 trillion in operating profit prior to the merger. However, losses in the battery segment outweighed the gains, with SK On reporting a net loss of KRW 5.36 trillion, partly due to impairment losses following the termination of a joint venture with Ford.
The rising risks associated with PRS are not limited to SK Innovation. Lotte Chemical entered into PRS contracts worth KRW 650 billion backed by shares of its Indonesian subsidiary, but has seen profitability decline amid global oversupply of ethylene driven by China. The company recognized derivative liabilities of KRW 254 billion.
Similarly, EcoPro reported derivative liabilities of KRW 113.8 billion tied to PRS contracts based on shares of EcoPro BM.
As market volatility persists, analysts warn that PRS-related financial risks are increasing across multiple industries, particularly for companies exposed to cyclical sectors such as batteries and petrochemicals.
Alphabiz Reporter Kim Jisun(stockmk2020@alphabiz.co.kr)
