Hong Kong, October 21, 2020 -- Moody's Investors Service has affirmed SK Hynix Inc.'s Baa2 issuer
and senior unsecured ratings.
The outlook remains negative.
The rating action follows the company's announcement that it will
acquire Intel Corporation's (A1 stable) NAND memory and storage business
for $9 billion [1].
"The ratings affirmation primarily reflects our expectation that the transaction
will strengthen SK Hynix's competitive position in the global memory
chip industry," says Sean Hwang, a Moody's Assistant
Vice President and Analyst.
"At the same time, the negative outlook factors in the likelihood
of a significant increase in SK Hynix's debt leverage stemming from
the large acquisition cost, against the backdrop of the uncertain
industry recovery and free cash flow generation over the next 12-18
months," adds Hwang.
RATINGS RATIONALE
According to SK Hynix's announcement on 20 October 2020, it
expects to pay $7 billion to acquire Intel's NAND storage
business and Dalian-based plant in late 2021. It then plans
to acquire the remaining assets, including certain intellectual
properties and workforce, for $2 billion in March 2025.
The transaction is subject to various regulatory approvals.
The acquisition of Intel's NAND business will significantly boost
SK Hynix's share of the global NAND market and, as a result,
solidify its competitive position as the world's second-largest
memory-chip maker. Its product mix, currently concentrated
around dynamic random-access memory (DRAM), will become more
balanced too, with DRAM and NAND respectively accounting for roughly
60% and 40% of revenue on a pro forma basis. The
company's modest presence in the NAND market has been a drag on
its credit quality.
On the other hand, Moody's expects the transaction to weaken
SK Hynix's leverage metrics, subject to the company's
financial strategy and industry conditions. Moody's expects
SK Hynix's adjusted debt/book capitalization to increase to 23%-25%
following the acquisition from 20% at the end of 2019, while
adjusted debt/EBITDA will remain broadly stable at 0.8x-1.0x
on a proforma basis including the full-year contribution of Intel's
NAND business. These ratios leave little buffer for any further
weakening in SK Hynix's current standalone credit quality.
These leverage projections assume SK Hynix will fund about 40%-50%
of the $7 billion (KRW8.2 trillion) first-phase consideration
out of its large cash holdings, and debt-fund the remainder.
SK Hynix's cash balance stood at KRW4.9 trillion as of 30
June 2020, and Moody's expects this sum to grow further to
KRW6 trillion-7 trillion until the first-phase close,
through free cash flow generation.
Moody's further expects adjusted EBITDA in 2021 (proforma,
including the full-year earnings of Intel's NAND business)
to be around KRW19 trillion, assuming a sustained recovery in the
global memory chip industry, in turn supported by growing memory
demand from smartphone and data server companies.
However, given the low visibility into the industry conditions and
the tenuous global economic recovery, there is a significant likelihood
that debt leverage will deteriorate more than Moody's currently
expects. Such a situation, which could result from weaker-than-expected
cash flow and higher use of debt for the acquisition, would heighten
downward pressure on SK Hynix's ratings.
SK Hynix's Baa2 ratings continue to factor in the company's strong
position in the global memory chip market and a one-notch uplift
based on the likelihood of support from its parent, SK Telecom Co.,
Ltd. (A3 negative). The ratings also take into account the
company's large investment requirements to stay competitive and
its heavy reliance on its DRAM business for profit generation.
In terms of environmental, social and governance (ESG) considerations,
the rating considers SK Hynix's increasingly aggressive investments and
shareholder distributions. That said, the risk is mitigated
by Moody's expectation that the company will focus on increasing its free
cash flow generation over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could return to stable if SK Hynix successfully improves its
earnings and controls its investments, thereby curbing a significant
further debt increase. Specifically, Moody's would
consider a change in outlook to stable if adjusted debt/EBITDA falls below
1.0x on a sustained basis and debt/capitalization remains below
23%-25%.
Moody's could downgrade SK Hynix's ratings if its financial profile weakens
further due to persistently weak profitability, aggressive shareholder
distributions, or heavy use of debt for the upcoming acquisition
of Intel's NAND business, such that adjusted debt/EBITDA remains
above 1.0x or debt/capitalization stays above 23%-25%.
The ratings could also be downgraded if there is a significant erosion
of SK Hynix's market positions or delays in technological migrations,
or an adverse change in the relationship between SK Hynix and SK Telecom.
The principal methodology used in these ratings was Semiconductor Industry
published in July 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1130733.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
SK Hynix Inc., a Korea-based company, is engaged
in the design, manufacture, and sale of memory chips,
mainly DRAM and NAND flash memory. It is 20.1% owned
by SK Telecom Co., Ltd.
REGULATORY DISCLOSURES
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analysis, see the sections Methodology Assumptions and Sensitivity
to Assumptions in the disclosure form. Moody's Rating Symbols and
Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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REFERENCES/CITATIONS
[1] Filing with the Financial Supervisory Service of Korea,
20-Oct-2020
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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
Sean Hwang
Asst Vice President - Analyst
Corporate Finance Group
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Chris Park
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