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Fitch Affirms Small Business Corporation at 'AA-'/Stable
August 31, 2017 / 11:02 AM / 3 months ago

Fitch Affirms Small Business Corporation at 'AA-'/Stable

(The following statement was released by the rating agency) HONG KONG, August 31 (Fitch) Fitch Ratings has affirmed Small Business Corporation's (SBC) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDR) at 'AA-' and Short-Term Foreign-Currency IDR at 'F1+'. The Outlooks on the Long-Term IDRs are Stable. Fitch has also affirmed SBC's senior unsecured bond at 'AA-'. KEY RATING DRIVERS Ratings Equalised With Sovereign: SBC's ratings are equalised with the ratings of Korea (AA-/Stable/F1+), reflecting its crucial strategic importance to government policy and high probability of extraordinary government support, which is legally based, if needed. Legal Status - Stronger: SBC, a national fund manager, is a quasi-government institution. It was established under the Small and Medium Enterprises Promotion Act, which stipulates its policy role and general operating regulations. The act requires a steering committee, which is comprised of civil servants from related ministries and SME experts. SBC solely manages the SME Establishment and Promotion Fund, with the act stipulating that the government absorb any fund losses. We view this as a solvency guarantee. Strategic Importance - Stronger: SBC performs a crucial role of promoting SME development and balanced national economic growth. SMEs, in general, can find it difficult to obtain finance through the private sector due to lack of collateral and short operating records. SBC, as an SME policy arm, provides a variety of funding options, particularly through the SME fund, which offers longer maturities and below-market interest rates. SBC also aids SMEs growth through non-financial assistance, such as consulting, training and export support. Control - Stronger: SBC is wholly government owned and operates under the Ministry of SMEs and Startups (MSS); elevated from the Small and Medium Business Administration in July 2017. This implies strengthened importance of SMEs under the current government's policy. MSS is closely involved in SBC's overall operations, including supervising its annual budget and evaluating performance. The president of Korea appoints SBC's president, who has executive powers. SBC is subject to various external audits by the MSS, National Assembly and the board of Audit and Inspection of Korea. Integration - Stronger: SBC consistently receives financial government support through loans and contributions, which covers the gap between SBC's lending rate and its funding costs. Contributions gradually increased by a CAGR of 15% between 2011-2016 to KRW549 billion, representing 61% of SBC's total revenue. An increasing amount of capital injections in the range of 4%-7% of equity also shows SBC's strong financial integration with the government. Its debt is considered a part of general government liabilities. Financial Profile - Breakeven Performance: SBC's profitability remains at breakeven and leverage is high given its public-policy role when consolidating the SME fund. Government contributions offset below-market-rate lending, often below funding cost. Fitch expects weak profitability in light of SBC's policy role. The entity's debt level is correlated with economic volatility. Fitch expects debt to increase in 2017 as the supplementary budget increases long-term debt, but to gradually decrease after. However, we believe the high leverage is mitigated by continuous capital injections of an estimated KRW800 billion in 2017. RATING SENSITIVITIES Credit-Linked to Sovereign: Positive rating action for the sovereign, in conjunction with consistent strong state support, would lead to positive rating action on SBC. Triggers for Downgrade: A sovereign downgrade, significant changes leading to a dilution of SBC's state ownership or control, or weakened government links or a languishing importance of its public-policy role may lead to negative rating action. Contact: Primary Analyst Ethan Lee Associate Director +852 2263 9912 Fitch (Hong Kong) Limited 19/F Man Yee Building 68 Des Voeux Road Central, Hong Kong Secondary Analyst Terry Gao Senior Director +852 2263 9972 Committee Chairperson Raffaele Carnevale Senior Director +39 02 87 90 87 203 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria International Local and Regional Governments Rating Criteria - Outside the United States (pub. 18 Apr 2016) here Rating of Public-Sector Entities – Outside the United States (pub. 22 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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