Moody's: Korea Telecom's 3Q 2013 Results are Credit Negative
Moody's Investors Services says KT Corporation's slower-than-expected reduction in its leverage, as indicated in its results for 3Q 2013, is credit negative.
KT announced its 3Q 2013 results on 1 November. Based on these, Moody's estimates that KT's adjusted debt/EBITDA for the 12 months to 30 September -- excluding its financial subsidiaries -- was approximately 2.4x.
While this showed moderate improvement from the 2.5x as of 30 June 2013, it remains weak for the rating level and is higher than our expectation.
"Although KT's reported consolidated EBITDA improved 6.2% in 3Q 2013 -- on a year-on-year basis due largely to the reduction in its handset subsidies -- the pace of improvement was slower than our expectations," says Yoshio Takahashi, a Moody's Assistant Vice President.
KT's consolidated revenue fell 7.3% in 3Q 2013 on a year-on-year basis due largely to weak performance in its handset sales and fixed-line voice. In addition, a seven-day business suspension in 3Q 2013 due to KT's provision of illegal handset subsidies during 1Q 2013 negatively affected its wireless segments.
At the same time, its reported consolidated debt stayed almost flat quarter-on-quarter at about KRW11.7 trillion at 30 September 2013.
KT has tried to reduce debt through the sale of non-core assets, such as its copper lines and real estate. However, the sale of non-core assets for the first nine months totaled only KRW13.4 billion.
Moody's expects KT's adjusted debt/EBITDA to improve gradually in the coming 12 months, given 1) the expected recovery in earnings, and the launch of LTE-Advanced and wideband LTE services in September, 2) the reduction of capital expenditures in 2014, and 3) further planned non-core asset sales.
However, continued intense competition for LTE subscribers and declines in revenue, especially fixed-line voice, could continue to pressure KT's overall financial profile. In addition, the quantum and timing of non-core asset sales in the future remain uncertain.
As such, the ratings could be downgraded in the next several quarters, if the company fails to improve earnings and reduce debt in a timely manner.
Moody's also notes that on 3 November, KT's Chairman expressed his intention to resign. Moody's notes that Chairman Lee is currently subject to an ongoing prosecutor-led investigation related to the sales of office buildings.
While this will not have any immediate rating impact, it will create a degree of uncertainty over KT's business strategy and execution until the new CEO assumes office. In addition, it could potentially affect the pace of the sale of its non-core assets, given increased public scrutiny.
Downward pressure could emerge if: (1) KT fails to maintain revenue growth and improve margins in its core telecoms business; (2) KT's market position erodes significantly; (3) competitive and regulatory pressures in Korea's telecoms market rise significantly, or (4) KT fails to reduce debt in a timely manner.
Specific indicators that Moody's would consider include: adjusted EBITDA margins and adjusted debt/EBITDA -- excluding its financial subsidiaries -- of below 25% and over 1.9x respectively, and total blended mobile average revenue per users (ARPU) below KRW36,000.
Furthermore, if KT's ability to continue with its handset receivables securitization program -- as currently structured -- becomes limited, it could negatively affect its rating, as associated borrowings would be brought back on its balance sheet, adversely impacting leverage.