TEXT-S&P summary: Korea Rail Network Authority
(The following statement was released by the rating agency)
Oct 29 -
Summary analysis -- Korea Rail Network Authority ------------------ 29-Oct-2012
CREDIT RATING: Country: Korea, Republic
Local currency AA-/Stable/--
Foreign currency A+/Stable/-- Primary SIC: Railroads
Credit Rating History:
Local currency Foreign currency
17-Sep-2012 AA-/-- A+/--
27-Jul-2005 A+/-- A/--
The ratings on Korea Rail Network Authority (KRNA) reflect Standard & Poor's Ratings Services' opinion that there is an "almost certain" likelihood of the government of the Republic of Korea (A+/Stable/A-1) providing the company with timely and sufficient extraordinary support in the event it were to suffer financial distress. Therefore, we have equalized the long-term credit ratings on the company with the long-term sovereign ratings on Korea. The government established KRNA in 2004 under the KRNA Act as a vehicle to execute government policy through oversight of construction and management of Korea's national railway network.
In accordance with our criteria for government-related entities (GREs), our rating approach is based on our view of KRNA's:
-- "Critical" role as the sole entity responsible for building and managing Korea's national railway network; and
-- "Integral" link with government given the government's full ownership and strong ongoing financial support. Through the Ministry of Land, Transport and Maritime Affairs, the government determines budgetary decisions and maintains tight control to ensure implementation of KRNA's policy role.
KRNA's role has grown particularly crucial, reflecting the government's focus on developing the country's railway infrastructure as a means to promote balanced development of the national economy and increase availability of more environmentally friendly modes of transportation. On April 4, 2011, the Ministry of Land, Transportation and Maritime Affairs announced its second development plan for the nationwide railway network. The plan aims to expand the high-speed rail network throughout the country and upgrade the conventional rail network between 2011 and 2020. We expect this plan to increase rail's share of national passenger traffic to 27.3% in 2020, from 15.9% in 2008, and of freight traffic to 18.5% in 2020, from 8.0% in 2008. KRNA is responsible for implementing the plan on the government's behalf. The company's importance to the government and the national economy, therefore, will remain high over the medium to long term.
We expect a high level of debt to remain a feature of KRNA's financial risk profile. A fee that Korea Railroad Corp. (foreign currency A+/Stable/A-1; local currency A+/Stable/A-1) pays to use the high-speed railway network is the main source of KRNA's operating income. But KRNA's operating income is insufficient to cover its financing costs, resulting in net losses in each of the last five years. We expect this trend to continue unless the fee for high-speed rail use increases significantly.
Furthermore, we anticipate that KRNA will increase capital expenditure for the next few years in line with the government's new railway network development plan. Contributions from the central government, together with advances from municipal and provincial governments and relevant government agencies, cover the total cost of constructing conventional and metropolitan commuter railways. However, government capital covers 50% of the cost of constructing the high-speed railway, with KRNA funding the remainder primarily through debt financing. In our opinion, KRNA will use bonds to cover insufficient cash flow and debt repayments, further increasing its borrowings.
However, we see some extraordinary support in the government's exceptional statutory guarantee under the KRNA Act. The KRNA Act implies that the government provides statutory guarantees on debt related to Korea's ongoing construction projects for high-speed rail.
In our view, KRNA relies heavily on extraordinary government support to manage its capital works, refinance its debt, and maintain its liquidity. Our expectation that the company can adequately manage its liquidity reflects its strong access to the domestic capital market, which benefits from its position as an important GRE in Korea.
On a stand-alone basis, including ongoing government subsidies for planned capital expenditures, we assess KRNA's liquidity to be less than adequate over the next 12 months. We base this assessment on our estimate that the company's sources of liquidity will equal 1.0x uses over the next 12 months. In our view, KRNA will have about Korean won (KRW) 5.5 trillion in liquidity--comprising cash, the government's capital contributions, and committed credit lines--compared with about KRW5.5 trillion in needs to cover a deficit in operating cash flow, capital spending, and debt maturities due in the next six months.
The stable outlook on KRNA reflects the outlook on the sovereign ratings on Korea because we have equalized the ratings on both based on our expectation that there is an almost certain likelihood of KRNA receiving extraordinary government support in times of financial distress.
Due to the equalization of the ratings, we would lower the ratings on KRNA if we lowered the sovereign ratings on Korea. Similarly, we would raise the ratings on KRNA if we raised those on Korea. However, a weakening of KRNA's role as a policy arm of government or of its link to the government could negatively affect the ratings on the company.
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