TEXT-Fitch rates Korea's KT Corporation's JPY notes 'A(EXP)'
(The following statement was released by the rating agency)
Jan 08 - Fitch Ratings has assigned South Korea-based KT Corporation's (KT, 'A'/Stable) proposed JPY senior notes an expected rating of 'A(EXP)'.
The final rating is contingent upon receipt of final documents conforming to information already received.
The notes are rated at the same level as KT's Issuer Default Rating of 'A' as they represent direct, unconditional, unsecured, and unsubordinated obligations of the company, ranking equally with other senior unsecured debt and subject to a negative pledge clause. However, as is common in Korean global bond issuance, the negative pledge clause does not protect bondholders from subordination through future grants of senior-ranking security interests to either debt denominated in Korean won or debt in any currency with a maturity less than one year from the date of issue.
The ratings reflect KT's position as a fully diversified telecommunications operator in South Korea, with leading market positions in the fixed-line and broadband businesses, and the second-largest market share in the wireless segment. However, Fitch believes that the company has little rating headroom and that further declines in telecom service margins or EBITDA are likely to lead to a negative rating action.
Fitch does not foresee any material improvement to KT's operating margins in 2013. This is because telecom operators are likely to continue to pursue aggressive marketing policies to expand their long term evolution subscriber base to improve average revenue per user. However, marketing efforts in early 2013, continuing from Q412, are unlikely to be as severe as witnessed in Q212-Q312, largely due to regulatory curb on excessive competition. For Q113, the regulatory body has suspended all telecom operators from subscriber acquisition for about 20 days.
Fitch forecasts that KT's net debt will continue to decline in 2013 with net debt/operating EBITDAR falling below 1.5x, (1.7x at end-2011), mainly due to cash received from the securitisation of handset instalment receivables, as well as reduced capex. KT, on a core telecom operation basis, has reduced net debt to KRW7.5trn at end-September 2012 from KRW8.5trn at end-2011. However, if KT makes a sizable debt-funded acquisition to expand its geographical footprint, or to diversify business portfolio, this would result in a negative rating action.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- further deterioration in the operating environment causing core telecom service margins or EBITDA to decline further
- debt-funded acquisitions leading to core telecom adjusted net debt/operating EBITDAR over 1.5x on a sustained basis
- negative pre-dividend free cash flow on a sustained basis
Positive: Given the company's difficult regulatory and market environment, positive rating actions are unlikely in the medium term.