October 19, 2017 / 12:14 PM / a year ago

Fitch Affirms KORAIL at 'AA-'; Outlook Stable

(The following statement was released by the rating agency) HONG KONG, October 19 (Fitch) Fitch Ratings has affirmed Korea Railroad Corp's (KORAIL) Long-Term Foreign-Currency Issuer Default Rating (IDR) and senior unsecured note ratings at 'AA-'. The Outlook on the IDR is Stable. KORAIL's ratings are equalised with those of the Korean sovereign (AA-/Stable) due to the company's strong links with the sovereign and its high strategic importance. As such, we believe there is a great likelihood that KORAIL would receive extraordinary government support, if needed. KEY RATING DRIVERS Legal Status Attribute Stronger: KORAIL is a statutory corporation that is wholly government owned via government ministries. According to the Korea Railroad Corporation Act (KRC Act), the government must contribute all of KORAIL's authorised capital and KORAIL is required to operate within the scope of related laws. Strategic Importance Attribute Stronger: KORAIL is Korea's sole national railroad operator, promoting efficient railroad operation as well as developing the railroad industry and consequently, the national economy, pursuant to the KRC Act. According to the Ministry of Land, Infrastructure and Transportation (MoLIT) 10-year national railroad network plan, the government will continue its investments to enhance connectivity between major cities, ease traffic congestion and strengthen the competitiveness of railroad logistics. This would increase KORAIL's strategic importance. Integration Attribute Midrange: KORAIL has received consistent government financial and operational support. The KRC Act enables the government to contribute 100% of authorised capital, provide discretionary guarantees on repayment obligations for issued bonds, expand KORAIL's debt capacity to 5x from 2x the sum of its paid-in-capital and reserves, support 50% of railway-car purchase costs and provide asset contributions, such as station facilities. In addition, the government compensates around 80% of the costs incurred from KORAIL's public-service-obligations, which accounts for 6.2% of the revenue, and all cost incurred from railroad maintenance work consigned by the Korea Rail Network Authority. Control and Oversight Attribute Stronger: The MoLIT is a principal regulator, overseeing matters relating to mid- and long-term financial management plans, budgeting, annual business plans, railroad management and operation as well as safety matters of railroads and railway cars pursuant to the KRC Act. The Ministry of Strategy and Finance supervises KORAIL's financial performance, regulatory objectives, operational status, personnel management and capitalisation in accordance with the Act on the Management of Public Institutions. Weak Standalone Financials: KORAIL is highly leveraged, bearing heavy interest expenses. Together with constrained pricing policies, this weakens its profitability. We expect KORAIL to continue posting negative free cash flow in 2017 in light of its large capex needs. That said, its maintenance costs/fixed asset ratio has gradually improved to 6.3% in 2016, from 7.0% in 2015, with 35.3% fixed-asset turnover (2013: 31.7%). Its adjusted net debt/EBITDA also fell to 16.4x, from 17.0x, and its interest coverage ratio improved to 1.6x from 1.4x. RATING SENSITIVITIES Credit-Linked with Sovereign: An upgrade of Fitch's credit view on the sovereign may trigger positive rating action on KORAIL. Downgrade Triggers: A sovereign downgrade, a dilution of government ownership or control or weakened government links, or a languishing importance of KORAIL's public-policy role may lead to a downgrade. Contact: Primary Analyst Ethan Lee Associate Director +852 2263 9912 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Guido Bach Senior Director +49 69 768076 111 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. 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