(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
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.