(The following was released by the rating agency)
SEOUL/SYDNEY/SINGAPORE, July 16 (Fitch) Fitch Ratings has affirmed Korea-based KT Corporation’s (KT) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at ‘A’ with Stable Outlook. The agency has also affirmed KT’s senior unsecured rating at ‘A’.
The affirmation reflects KT’s position as a fully diversified telecommunications operator in South Korea, with leading market positions in the fixed-line and broadband businesses, and the second-largest market share in the wireless segment. However, Fitch believes that the company has little headroom in its ‘A’ ratings and that further declines in telecom service margins or the absolute level of EBITDA are likely to lead to a negative rating action.
KT’s EBITDAR margin, based on telecom service revenue excluding handset sales, contracted to 33% in Q112 and 29.8% in 2011 (Q111: 35.2%, 2010: 32%). The company also experienced a significant deterioration in cash flow from operations to KRW2.2trn in 2011 from KRW3trn in 2010 due to working-capital requirements related to handset instalment receivables. As a result, the company’s financial leverage, measured by net debt/EBITDAR, increased to 1.7x at end-2011 from 1.3x at end-2010.
However, Fitch forecasts that KT’s leverage will improve significantly from 2012, with net debt/operating EBITDAR falling well below 1.5x, due to cash received from the securitisation of handset instalment receivables. In addition, outstanding instalment receivables, amounting to KRW4trn at end-2011, will be collected over the next 24 months, resulting in strong FCF generation in 2012 and 2013.
On the other hand, Fitch does not foresee any material improvement in KT’s operating margins in 2012. This is because telecom operators, especially KT with the smallest long term evolution (LTE) subscriber market share, are likely to pursue aggressive marketing policies to expand their LTE subscriber base.
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 KT’s ratings as it may cause a slowdown in revenue growth and decline in profitability, as seen in the past.
What Could Trigger A Rating Action?
Positive: Given the company’s regulatory and market environment, positive rating actions are unlikely in the medium term.
Negative: Future developments that may, individually or collectively, lead to negative rating action include
- further deterioration in the operating environment resulting in telecom service margins or the absolute level of EBITDA continuing to decline further
- telecom business adjusted net debt/operating EBITDAR over 1.5x on a sustained basis
- negative pre-dividend free cash flow on a sustained basis