(The following was released by the rating agency)
SYDNEY/SEOUL, October 12 (Fitch) Fitch Ratings has assigned South Korea-based SK Telecom Co., Ltd's (SKT; 'A-'/Stable) USD3bn global medium-term note (MTN) programme an 'A-' rating.
The programme is rated at the same level as SKT's Issuer Default Rating to reflect that that issues under the programme will be direct, unconditional, unsecured, and unsubordinated obligations of SKT, ranking equally with other senior unsecured debt, subject to a negative pledge clause. However, as is common in Korean global bond programmes, the negative pledge clause does not protect bondholders from subordination through future grants of senior-ranking security interests to either debt denominated in Korean won or to debt in any currency with a maturity less than one year from the date of issue.
Whilst Fitch believes that the company does not plan to issue secured debt, if such debt were to become a significant feature in SKT's capital structure, issues from the programme may be rated lower than 'A-'
Another credit weakness, common to many such programmes in Korea, is that cross-default provisions only apply to foreign-currency debt which has a maturity of greater than one year from the date of issue. Therefore, holders of the notes will not be able to accelerate on the default of foreign-currency debt with a maturity less than one year from the date of issue or of any Korean won debt.
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.
SKT's consolidated operating EBIDAR margin contracted to 26% in H112 from 31% in H111, due to high marketing expenses in the competitive 4G market. Net debt also significantly increased to KRW6.1trn at end-June 2012 from KRW3.3trn at end-2011 due to the acquisition of SK Hynix Inc. ('BB'/Stable) in February 2012. As a result, Fitch forecasts that SKT's funds flow from operations (FFO)-adjusted net leverage will increase to 1.6x at end-2012 from just 0.7x at end-2011.
Fitch does not foresee any material improvement in SKT's or its competitors' operating margins over the next 12-18 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.
Nevertheless, Fitch believes that, barring sizable acquisitions, SKT's financial leverage will slowly improve from 2013. Fitch forecasts that SKT will be able to maintain positive free cash flow (FCF) generation in 2012 and 2013 as capex requirements will decline from H212 with the completion of the nation-wide LTE coverage in H112. As a result, FFO-adjusted net leverage is likely to fall towards 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 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 company's regulatory and market environment, positive rating actions are unlikely in the medium term.
Keywords: MARKETS RATINGS SKTELECOM