(Repeat for additional subscribers)
Oct 2 (The following statement was released by the rating agency)
Fitch Ratings has downgraded Korea-based KT Corporation's (KT) Long-Term
Foreign- and Local- Currency Issuer Default Ratings (IDR) and senior unsecured rating to 'A-'
from 'A', and removed them from Rating Watch Negative (RWN). The Outlook on the IDRs is Stable.
KEY RATING DRIVERS
Not Enough Deleveraging: The downgrade reflects KT's weak financial metrics
despite likely deleveraging from 2014. Fitch forecasts the company to generate
positive free cash flow (FCF) as annual capex decreases towards KRW3trn from
2014. However, any significant improvement in operating EBITDAR is unlikely,
thus the leverage ratio, measured as net debt/operating EBITDAR on a core
telecom basis, will remain above 1.5x over the medium term. (end-2012: 1.7x)
Easing Competition: Fitch believes that the regulator's close watch to prevent
price competition from overheating will continue for the short term. The agency
believes that KT will continue to benefit from the easing of competitive
pressures and that its core-telecom EBITDA margins for 2013 will be roughly in
line with the H113 level of 27.2% (2012: 26.6%).
The regulator, the Korea Communications Commission, has taken to steps to punish
operators with subsidy pricing policies that discriminate between subscribers.
In addition, new subsidy regulation may come into law in Q413, which should
provide additional disincentive against excessive subsidy-based competition.
Consequently, South Korean mobile operators have refrained from aggressively
adding subscribers in H113.
Rising Mobile ARPU: Fitch forecasts that KT's mobile average revenue per user
(ARPU) will continue to rise over the medium term as it increases its long-term
evolution (LTE) subscriber base; ARPU improved to KRW34,676/month in Q213
(KRW32,978 in Q212). LTE subscribers formed 36.8% of the company's mobile
customers at end-Q213 and Fitch forecasts this proportion to increase to close
to 50% by end-2013.
Fixed-Line Revenue Contraction: Fitch expects KT's broadband and fixed-line
voice revenue and ARPU to continue to decline over the long term. This is
because subscriber growth will remain marginal as the market becomes
increasingly saturated amid intense competition. In addition, price discounts
from bundling and migration to a cheaper voice-over-internet-protocol (VoIP)
service will continue to erode profitability. This trend is unlikely to reverse.
Disposal of non-core assets: KT's weak FCF generation will be partially
mitigated by the company's plan to continue to sell its surplus real estate and
copper from its legacy cable network that is being replaced by fibre. Fitch
forecasts that this will consistently generate at least KRW150bn each year over
the long term.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include
- further deterioration in the operating environment causing core telecom
service EBITDAR margin to decline to below 25% (2012: 27%)
- Core-telecom adjusted net debt/operating EBITDAR sustained at over 2x
- Core-telecom adjusted net debt including handset receivables
securitizations/operating EBITDAR sustained at over 2.5x (end-2012: 2.3x)
- 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.