(The following was released by the rating agency)
SYDNEY/SEOUL, October 12 (Fitch) Fitch Ratings has assignedSouth 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 IssuerDefault Rating to reflect that that issues under the programmewill be direct, unconditional, unsecured, and unsubordinatedobligations of SKT, ranking equally with other senior unsecureddebt, subject to a negative pledge clause. However, as is commonin Korean global bond programmes, the negative pledge clausedoes not protect bondholders from subordination through futuregrants of senior-ranking security interests to either debtdenominated in Korean won or to debt in any currency with amaturity less than one year from the date of issue.
Whilst Fitch believes that the company does not plan toissue secured debt, if such debt were to become a significantfeature in SKT's capital structure, issues from the programmemay be rated lower than 'A-'
Another credit weakness, common to many such programmes inKorea, is that cross-default provisions only apply toforeign-currency debt which has a maturity of greater than oneyear from the date of issue. Therefore, holders of the noteswill not be able to accelerate on the default offoreign-currency debt with a maturity less than one year fromthe date of issue or of any Korean won debt.
The ratings reflect SKT's position as a fully diversifiedtelecommunications operator in South Korea, with a leadingmarket position in the mobile segment, and the second-largestmarket share in broadband.
SKT's consolidated operating EBIDAR margin contracted to 26%in H112 from 31% in H111, due to high marketing expenses in thecompetitive 4G market. Net debt also significantly increased toKRW6.1trn at end-June 2012 from KRW3.3trn at end-2011 due to theacquisition of SK Hynix Inc. ('BB'/Stable) in February 2012. Asa result, Fitch forecasts that SKT's funds flow from operations(FFO)-adjusted net leverage will increase to 1.6x at end-2012from just 0.7x at end-2011.
Fitch does not foresee any material improvement in SKT's orits competitors' operating margins over the next 12-18 months.This is because all three Korean telecom operators are likely topursue aggressive marketing policies to meet long term evolution(LTE) subscriber targets.
In addition, the regulatory body is likely to maintainpressure for tariff discounts in the short-to-medium term. As aresult, regulatory risk will continue to weigh on SKT's ratingsthrough a slowdown in revenue growth and decline inprofitability, as seen in the past.
Nevertheless, Fitch believes that, barring sizableacquisitions, SKT's financial leverage will slowly improve from2013. Fitch forecasts that SKT will be able to maintain positivefree cash flow (FCF) generation in 2012 and 2013 as capexrequirements will decline from H212 with the completion of thenation-wide LTE coverage in H112. As a result, FFO-adjusted netleverage is likely to fall towards 1.5x by end-2013.
What Could Trigger A Rating Action?
Negative: Future developments that may, individually orcollectively, lead to negative rating action include
- further deterioration in the operating environmentresulting 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 marketenvironment, positive rating actions are unlikely in the mediumterm.
Keywords: MARKETS RATINGS SKTELECOM