Hong Kong, August 30, 2019 -- Moody's Investors Service has assigned a Baa2 rating to the proposed senior
unsecured USD notes to be issued by SK Hynix Inc. (Baa2 negative).
The rating outlook is negative.
SK Hynix will use the proceeds from the notes for general corporate purposes,
including the repayment of outstanding borrowings and capital expenditures.
RATINGS RATIONALE
"SK Hynix's Baa2 rating reflects its strong position as the world's
second-largest memory chip producer and the likelihood of support
from its largest shareholder, SK Telecom Co., Ltd.,
in case of need, which results in a one-notch rating uplift
from its underlying credit quality," says Sean Hwang, a Moody's
Analyst.
"At the same time, the rating also takes into consideration
SK Hynix's high reliance on dynamic random-access memory (DRAM)
chips for profit generation, and the high cyclicality and sizeable
investment requirements inherent to the memory chip business,"
adds Hwang.
Moody's expects the company's adjusted debt to increase to around KRW11
trillion by the end of 2019 from KRW5.4 trillion at the end of
2018, to fund its elevated capital spending amid a decline in earnings.
Moody's expects the company's adjusted EBITDA will fall to
around KRW11-KRW12 trillion for full-year 2019 from KRW27.7
trillion in 2018, reflecting a steep drop in memory chip prices.
As a result, SK Hynix's adjusted debt/EBITDA will likely rise to
around 1.0x for 2019 from 0.2x in 2017-18.
Similarly, Moody's expects adjusted debt/capitalization will
weaken to around 18% from 10%-11% over the
same period. These ratios are weak for its Baa2 rating category.
Moody's expects SK Hynix's earnings to recover modestly in 2020,
as a moderate recovery in demand and the major chipmakers' announced production
cuts should help stabilize industry conditions. Moody's also expects
SK Hynix to scale down its capital spending next year.
Nonetheless, it remains to be seen whether SK Hynix can meaningfully
improve its capital structure and financial flexibility in 2020,
given the low visibility of key end-market demand and uncertainty
over its ability to significantly reduce its capital spending to preserve
free cash flow.
The negative outlook mainly reflects the company's declining financial
flexibility, as reflected by its increasing debt, and the
aforementioned uncertainty around its ability to preserve free cash flow
and recover its capital structure in 2020. The maintenance of a
conservative capital structure is important to the company, given
the high capital intensity and cyclicality of the memory chip industry.
In terms of environmental, social and governance (ESG) considerations,
the rating considers SK Hynix's increasingly aggressive investments and
shareholder distributions. However, this risk is somewhat
mitigated by Moody's expectation that the company will adjust the
pace and size of its investments and shareholder returns in response to
industry conditions.
The outlook could return to stable if SK Hynix successfully improves its
earnings and controls its investments, thereby curbing a significant
further increase in debt. Such developments could be evidenced
by adjusted debt/EBITDA falling below 1.0x on a sustained basis
and debt/capitalization remaining below 18%.
Moody's could downgrade SK Hynix's rating if its financial profile weakens
further due to persistently weak profitability, aggressive investments
or shareholder distribution policies, such that adjusted debt/EBITDA
remains above 1.0x or debt/capitalization stays above 18%-20%.
Downward rating pressure could also arise 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 this rating was Semiconductor Industry
published in July 2018. 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,
such as DRAM and NAND flash memory. It is 20.1% owned
by SK Telecom Co., Ltd.
REGULATORY DISCLOSURES
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
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Please see www.moodys.com for any updates on changes to
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for additional regulatory disclosures for each credit rating.
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.
Sean Hwang
Analyst
Corporate Finance Group
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
Chris Park
Associate Managing Director
Corporate Finance Group
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
