(The following statement was released by the rating agency)
Dec 05 - Fitch Ratings has assigned Korea-based SK Telecom Co., Ltd’s (SKT; ‘A-'/Stable) USD700m notes a final rating of ‘A-'.
The final rating follows the receipt of documents conforming to information already received, and is in line with the expected rating assigned on 24 October 2012. The notes are rated at the same level as SKT as they constitute direct, unconditional, unsecured and general obligations of the company.
The ratings reflect SKT’s position as a fully diversified telecommunications operator in South Korea, with a leading market position in the mobile segment, and the second-largest market share in broadband.
Fitch forecasts SKT’s consolidated operating EBITDAR margin to continue to decline, to about 26%-27% in 2012 (29% in 2011), due to marketing expenses in the competitive 4G market. It also forecasts that SKT’s funds flow from operations (FFO)-adjusted net leverage will increase to 1.5x at end-2012 from just 0.7x at end-2011. This is because net debt increased to KRW6.1trn at end-September 2012 from KRW3.3trn at end-2011 due to the acquisition of SK Hynix Inc. (‘BB’/Stable) in February 2012.
Fitch does not foresee any material improvement in SKT’s or its competitors’ operating margins over the next 12 to 18 months. This is because all three Korean telecom operators are likely to pursue aggressive marketing policies to meet long term evolution (LTE) subscriber targets.
In addition, the regulatory body is likely to maintain pressure for tariff discounts in the short-to medium-term. As a result, regulatory risk will continue to weigh on SKT’s ratings through a slowdown in revenue growth and decline in profitability, as seen in the past.
Fitch believes that, barring sizable acquisitions, SKT’s financial leverage will slowly improve from 2013. The agency forecasts that SKT will be able to generate positive free cash flow (FCF) in 2013 as capex requirements decline with the completion of the nation-wide LTE coverage in 2012. As a result, FFO-adjusted net leverage is likely to fall below 1.5x by end-2013.
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 resulting in operating EBITDAR margins falling below 25%
- FFO-adjusted net leverage over 1.75x on a sustained basis
- negative pre-dividend free cash flow on a sustained basis
Positive: Given the regulatory and operating environment for Korean telcos, positive rating actions are unlikely in the medium term.