Dec 13 -
Summary analysis -- Korea Expressway Corp. ------------------------ 13-Dec-2012
CREDIT RATING: A+/Stable/-- Country: Korea, Republic
Primary SIC: Highway and
Mult. CUSIP6: 50064L
Mult. CUSIP6: 50065J
Mult. CUSIP6: 50065K
Mult. CUSIP6: 50066H
Credit Rating History:
Local currency Foreign currency
17-Sep-2012 A+/-- A+/--
12-Nov-2009 A+/-- A/--
Rating Rating Date
US$500 mil 4.90% bnds due 07/01/2013 A+ 17-Sep-2012
US$500 mil 4.875% global bnds due 04/07/2014 A+ 17-Sep-2012
US$500 mil 5.125% global bnds due 05/20/2015 A+ 17-Sep-2012
EUR400 mil 4.375% nts due 09/27/2016 A+ 17-Sep-2012
EUR42 mil 4.375% sr nts due 09/27/2016 A+ 17-Sep-2012
(bnd ins: MBIA Insurance Corp. )
US$700 mil 4.50% med-term nts ser 2 due
03/23/2015 A+ 17-Sep-2012
US$30 mil 4.875% bnds due 04/07/2014 A+ 17-Sep-2012
(bnd ins: MBIA Insurance Corp.)
EUR42 mil 4.375% med-term nts due 09/27/2016 A+ 17-Sep-2012
(bnd ins: MBIA Insurance Corp.)
US$3.5 bil med-term note Prog 10/07/2009: sr
unsecd A+ 17-Sep-2012
HKD452 mil 4.00% med-term nts ser 7 due
03/02/2022 A+ 17-Sep-2012
US$500 mil 1.875% med-term nts due 10/22/2017 A+ 15-Oct-2012
The ratings on Korea Expressway Corp. (KEC: foreign currency rating A+/Stable/--; local currency rating A+/Stable/--) reflect Standard & Poor’s Ratings Services’ opinion that there is an “extremely high” likelihood of the government of the Republic of Korea (foreign currency rating A+/Stable/A-1; local currency rating AA-/Stable/A-1+) providing KEC with timely and sufficient extraordinary support in the event it were to suffer financial distress.
In accordance with our criteria for government-related entities (GREs), we base our view of the “extremely high” likelihood of extraordinary government support on the following characteristics of KEC:
-- “Very important” role as the sole government-owned national expressway builder and operator; and
-- Integral link with Korea’s government, given the government’s direct and indirect ownership of 99.98% of KEC, strong ongoing financial support, and tight supervisory control through the Ministry of Land, Transport, and Maritime Affairs.
We lowered our assessment of KEC’s importance to the government to “very Important” from “critical” on Sept. 17, 2012, reflecting the government’s policy to make significant investments in railway networks to promote environmentally friendly modes of transportation.
Still, we believe KEC will remain of very high importance to the national economy and the government because KEC is the sole government-owned and dominant company responsible for constructing, maintaining, and operating the expressway network forming the backbone of Korea’s transportation system and linking key economic areas with major ports. Since the government established KEC in 1969, the corporation has supervised construction of and operated 31 expressway routes--stretching 3,632 km and comprising 92.8% of the country’s entire expressway network. International trade is the main driver of the Korean economy, making an extensive expressway network essential. Furthermore, the government’s abolition of minimum revenue guarantees, which were aimed at mitigating risks of low traffic volume, and opposition from the public to higher toll rates will likely limit private sector engagement in construction and operation of expressways in Korea.
The stand-alone credit profile (SACP) of ‘bbb-’ reflects our view that KEC has a strong business profile, based on its dominant position in the Korean toll road sector, and stable and resilient EBITDA in its toll road businesses. Offsetting these strengths is the company’s aggressive financial risk profile due to ongoing needs to make large capital expenditures.
We view KEC’s financial risk profile as aggressive. KEC’s domination of the toll road sector and the resilience of toll revenue to economic downturns have produced stable and predictable EBITDA. However, continually large capital expenditures have led to negative free operating cash flow, which in turn has resulted in incremental increases in borrowings. Negative free operating cash flow will likely continue over the next few years, although we expect capital expenditures to fall somewhat as the government shifts its investment focus to implement its 10-year railway expansion plan.
We expect cash flow coverage ratios for the company to remain weak, with funds from operations (FFO) to debt of below 5% for the next few years. On the other hand, the government’s ongoing capital contributions will likely keep debt to total capital below 50%. The government historically covered about 35% to 50% of the company’s total costs for expressway construction. We have incorporated the government’s ongoing financial support into our assessment of the SACP for KEC. In our view, the SACP could come under pressure if negative free operating cash flow widens, causing further deterioration in the financial ratios mentioned.
We assess KEC’s liquidity to be adequate, including ongoing support from the government for capital expenditures. We base our liquidity assessment on the following factors and assumptions:
-- We expect the company’s sources of liquidity to exceed 1.2x uses over the next year;
-- We estimate the company will have Korean won (KRW) 3.1 trillion in liquidity, comprising cash, funds from operations, ongoing government financial support, and committed bank facilities;
-- We estimate the company will need about KRW2.5 trillion to cover debt due in the next six months, committed capital spending, and dividends; and
-- KEC has supportive banking relationships and good access to the domestic capital market, benefiting as it does from being a major GRE in Korea.
The stable outlook reflects our expectation that KEC’s very important role for and integral link to the government will attract continued government support for the entity. The rating on KEC could come under pressure if the company’s policy role or link to the government weaken, such as if the government reduces its stake in the company or the SACP for the company deteriorates to below ‘bb-'.
Related Criteria And Research
-- Rating Government-Related Entities: Methodology And Assumptions, Dec. 9, 2010
-- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009