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Moody's: SKT and KT's ratings unaffected by spectrum auction bids

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Moody's Investors Service says the successful bids by SK Telecom and KT Corporation for spectrum blocks will increase adjusted leverage for both companies, but will not affect their ratings and stable outlooks.

On 2 May, Korea's Ministry of Science, ICT and Future Planning (MSIP) released results of the spectrum auctions held in April 2016.

SKT won the auction for two bandwidth blocks in the 2.6 GHz band for around KRW1.28 trillion, while KT won the auction for the 1.8 GHz bandwidth block for KRW451 billion.

25% of the bid payments will be due upfront, and the remaining 75% will be paid annually over license periods of 10 years.

Moody's expects that the upfront payments will be funded by the companies' existing cash holdings.

"The winning prices are reasonable, although the deferred auction payments -- which we treat as adjusted debt -- will slightly increase SKT and KT's adjusted leverage," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

Moody's estimates that SKT's and KT's adjusted debt/EBITDA will increase by around 0.2x and 0.1x, respectively, as a result of the auctions and the renewal of the companies' existing 2.1 gigahertz blocks later this year.

"Although SKT's leverage in 2016 is high for its A3 rating due to the deferred spectrum payments, this concern is mitigated by its expected deleveraging from 2017," adds Tsuen, who is also the Lead Analyst for SKT.

Following a KRW500 billion share buyback in 2015 related to its acquisition of SK Broadband Co. Ltd. (unrated), SKT's adjusted debt/EBITDA rose to 1.8x in 2015 from 1.6x in 2014.

Moody's expect SKT's financial leverage to be around 1.9x in 2016 without the new spectrum payment and after factoring in an upcoming investment of around KRW700 billion in CJ Hellovision Co. Ltd (unrated), Korea's largest cable TV and second-largest pay TV operator.

With the new spectrum obligations, its adjusted debt/EBITDA will increase further to around 2.1x.

However, Moody's expects SKT's financial leverage to decrease to about 2.0x in 2017 on the back of debt reductions, which will be underpinned by solid operating cash flow generation and manageable capital expenditure.

KT is better positioned to absorb the impact of higher leverage on its Baa1 rating. The company reduced its leverage to 2.0x in 2015 from 2.5x in 2014 following last year's sale of KT Rental Co., Ltd. (unrated) and KT Capital Co., Ltd. (unrated).

In this regard, even after the spectrum-related debt is incorporated, its adjusted leverage of 2.1x (compared with 2.0x without the new spectrum obligations) should remain solid for its Baa1 rating category.

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