Hong Kong, May 06, 2022 -- Moody's Investors Service has assigned an Aa2 rating to the proposed senior unsecured US dollar notes to be issued by Korea Expressway Corporation (KEC, Aa2 stable).
The rating outlook is stable.
The notes will be issued under KEC's existing USD3.5 billion global medium-term note (MTN) program, which is rated (P)Aa2.
KEC plans to use the net proceeds from the proposed issuance for general corporate purposes, including to repay its maturing debt.
RATINGS RATIONALE
"The Aa2 rating reflects our assessment of a very high likelihood of extraordinary support for KEC from the Government of Korea, which underpins a six-notch uplift to its rating from its Baseline Credit Assessment (BCA)," says Mic Kang, a Moody's Vice President and Senior Credit Officer.
Moody's expectation of a very high likelihood of government support in times of need is based on KEC's critical policy roles in Korea's transportation industry, with a mandate to construct, operate and maintain most toll roads in the country, under the supervision of the Government of Korea (Aa2 stable).
This assumption of support also considers Moody's expectation that the government will provide assistance in the event of disruptions at KEC, to prevent the spread of substantial contagion risks to local financial markets and the overall government-related issuer (GRI) sector. The assessment factors in the government's strong ability to provide support, as reflected in its Aa2 rating.
The government has also established a track record of closely monitoring and managing the financial health of KEC and other GRIs, and has indicated its commitment to preventing financial distress at KEC.
Moody's has maintained its assessment of "Very High" government support for KEC under the agency's Joint Default Analysis for GRIs. Moody's has also continued to assess KEC's dependence on the Korean government as "Very High" because of the close operational and financial linkages between the two entities.
KEC's baa2 BCA considers the company's dominant market position in Korea's toll road sector; its steadily growing traffic volume; and its adequate financial profile, which is supported by regular capital injections from the government. These strengths are tempered by the low visibility on toll rate adjustments and the company's increased debt-funded capital spending to construct new toll road projects.
Moody's expects KEC's funds from operation (FFO)/adjusted debt to stay at 5%-7% over the next 12-18 months, which is slightly higher than or similar to around 5%-6% in 2021. This is because growing traffic volume and increasing toll collections, along with the Korean government's regular capital injections, will mitigate a rise in debt to fund its increasing capital spending. These financial metrics will continue to position KEC's BCA at baa2.
Moody's has also considered the following environmental, social and governance (ESG) factors.
KEC's exposure to environmental and social risks is low because traffic volumes in Korea will continue to be mainly driven by economic activities, business sentiment, leisure activities, population growth and personal mobility requirements, rather than by environmental and social factors, such as carbon transition, physical climate risks, waste and pollution and demographic and societal trends.
In terms of governance, KEC's debt-funding to cover part of the capital spending required to construct new toll roads will increase. This risk is mitigated by the Korean government's tight supervision of and extraordinary support for the company.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATING
The stable outlook on KEC's ratings is in line with the stable outlook on the Korean government's rating, and reflects Moody's expectation that the company's strategic importance to and the strong support from the government, if and when needed, will remain intact over the next 12-18 months.
An upgrade of Korea's sovereign rating will likely trigger a review of KEC's ratings. Moody's could upgrade KEC's BCA if its FFO/debt exceeds 7% on a sustained basis.
A downgrade of Korea's sovereign rating will result in a downgrade of KEC's ratings. In addition, Moody's could downgrade the company's rating if there are significant adverse changes in its relationship with the government or in its policy role.
Moody's could downgrade KEC's BCA if its FFO/debt falls below 5% on a sustained basis. However, such a weakening in KEC's credit metrics would not have an immediate impact on the company's ratings because of the very high likelihood of extraordinary support from the government, which provides a buffer to the ratings.
The methodologies used in this rating were Privately Managed Toll Roads Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1244932, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Korea Expressway Corporation (KEC, Aa2 stable) constructs, manages and operates Korea's expressway network. As of December 2021, KEC was 99.99% owned by the Government of Korea (Aa2 stable), directly or indirectly.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity 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.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
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Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.
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The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating.
Mic Kang
VP - Senior Credit Officer
Project & Infrastructure Finance
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Yian Ning Loh
Associate Managing Director
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong,
China (Hong Kong S.A.R.)
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
