(The following was released by the rating agency)
SEOUL/SYDNEY/SINGAPORE, September 26 (Fitch) Fitch Ratings has assigned South Korea-based SK Telecom Co., Ltd's (SKT) JPY70bn medium-term note (MTN) programme an 'A-' rating.
Fitch expects bond issuance under the programme to be direct, unconditional, unsecured, and unsubordinated obligations of SKT, ranking equally with other senior unsecured debt. However, should any issue under the programme constitute a different class than this, the rating of such an issue may differ from the programme's 'A-' rating.
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.