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Oct 2 (Reuters) - (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.
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.