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Moody's revises outlook on KT's Baa1 rating to positive

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Moody's Investors Service has revised the outlook on South Korea's KT Corp's rating positive from stable.

"The positive outlook reflects our expectation that KT's financial leverage will gradually decline over the next 1-2 years, driven by improving operating performance and solid cash flow generation," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

KT's financial leverage -- as measured by adjusted debt/EBITDA -- significantly improved to 2.0x in 2015 from 2.5x in 2014, and Moody's expects this ratio (including deferred spectrum obligations) to improve further to 1.8x-1.9x by 2017. This improvement is despite the incremental adjusted debt stemming from the deferred auction payments in 2016. This level of leverage is solid for the Baa1 rating category.

Moody's expectation is based on (1) KT's steady earnings growth, driven by stabilized marketing expenses and continued growth in mobile/broadband revenue; and (2) robust operating cash flow and moderate capital expenditures, both of which should allow the company to generate sizeable free cash flow and reduce debt.

While Korea's National Assembly is considering to remove the legal cap on handset subsidies, Moody's does not expect this will intensify market share competition among telecom operators, or that it will lead to a material increase in their marketing expenses. Instead, Moody's expects the operators will focus on profitability rather than expanding their market share.

KT's rating is also supported by its competitive strength as a fully integrated telecommunications operator, with significant market shares across all major segments in the domestic market.

On the other hand, KT's rating is constrained by its moderate profitability as a result of intense competition and declining fixed-line revenue.

Upward pressure on the ratings could emerge if KT: (1) maintains revenue growth and improves its margins by keeping its competitive position, and improves average revenue per user (ARPU) and operating efficiency in its core telecommunications business; (2) maintains its prudent investment and financial policies; and (3) improves its debt leverage, with adjusted debt/EBITDA below 2.0x on a sustained basis.

Moody's also assumes that KT will continue with its handset receivables securitization program, as currently structured.

KT's rating outlook could return to stable if: (1) the revenue and earnings for KT's core telecommunications business declines because of an erosion in its market position and/or pressures from intense competition or regulatory changes; and/or (2) its debt leverage increases, with adjusted debt/EBITDA over 2.0x-2.2x on a sustained basis.

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 will likely be brought back on its balance sheet, adversely impacting its leverage.

KT Corporation is the largest provider of integrated telecommunications services in Korea by revenue. It focuses on fixed-line telephony, broadband Internet access, data communication, mobile telecommunication, IPTV, leased-line and satellite, as well as system and network integration services.

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Tags: korea telecom  moodys  Korea