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Rating Action:

Moody's assigns Baa2 to HKT's senior unsecured guaranteed notes; outlook stable

 The document has been translated in other languages

05 Jan 2015

Singapore, January 05, 2015 -- Moody's Investors Service has assigned a Baa2 rating to HKT Capital No. 1 Limited's proposed USD senior unsecured zero coupon notes due 2030. HKT Capital No. 1 is a direct and wholly-owned subsidiary of Hong Kong Telecommunications (HKT) Limited (HKT, Baa2 stable).

The proposed notes will be irrevocably and unconditionally, jointly and severally guaranteed by Hong Kong Telecommunications (HKT) Limited and its parent, HKT Group Holdings Limited (HKT Group, unrated).

The rating outlook is stable.

HKT Group is a direct and wholly owned subsidiary of HKT Limited (unrated), which in turn is listed on the Hong Kong Stock Exchange.

HKT is an indirect and wholly owned subsidiary of HKT Group and is HKT Limited's principal operating entity. Moody's therefore considers HKT Limited's operating and financial metrics when assessing HKT's credit risk profile.

The bond proceeds will be used primarily to refinance existing debt, including, PCCW-HKT Capital No.3 Limited's USD500 million (HKD3.9 billion) notes due July 2015.

RATINGS RATIONALE

While HKT Limited has paid down its debt by using cash proceeds from its rights issue in July 2014, its adjusted debt/EBITDA is likely to remain in the 3.0x-3.5x range over the next 12 months. Furthermore, this pre-financing will cause a temporary spike in HKT Limited's leverage as of June 2015, if the proceeds are not used to pay down debt imminently.

"HKT Limited's leverage remains high for its Baa2 rating", says Nidhi Dhruv, a Moody's Assistant Vice President and Analyst. "Nevertheless, this is partially mitigated by the company's strong operating profile as the only quad-play operator in Hong Kong, along with the internet protocol TV (IPTV) business of its parent, PCCW Limited (unrated), and leading market positions in all services."

HKT Limited's absolute debt level is likely to remain almost unchanged over at least the next 12 months, because it will use its operating cash flows to fund capex and distributions to shareholders, rather than to repay debt.

Moody's expect that HKT Limited will refinance all of its debt when they come due. HKT Limited should have no need to increase its debt facilities, in the absence of a fundamental shift in its business model or a major acquisition.

"HKT Limited's 1H 2014 results were in line with our expectations. Its revenue grew 13% year-on-year, and its EBITDA grew 15% over the same period, reflecting stable performances from its telecommunications services segment, as well as the consolidation of CSL with its mobile business," adds Dhruv who is also Moody's Lead Analyst for HKT.

Moody's expects that while PCCW's media business will maintain solid growth in excess of 10% in 2014 and 2015 by cross selling its IPTV services to HKT Limited's expanded mobile customer base — due to the acquisition of CSL — PCCW's EBITDA margin for its media business is likely to stay in the 10%-15% range, given its higher content costs.

The stable outlook reflects Moody's expectation that HKT Limited will maintain its leading market position in all major segments, keep its adjusted debt/EBITDA within the 3.0x-3.5x range, and maintain an adjusted EBITDA margin of approximately 40%, on a sustained basis.

Upward rating pressure is unlikely because HKT Limited's high leverage for its rating level is a situation which is likely to persist.

However, a rating upgrade would be possible if HKT Limited retains its solid market positions in all major segments and improves its financial profile significantly.

Specific metrics that Moody's will consider for an upgrade include: adjusted debt/EBITDA of less than 2.75x-3.00x on a sustained basis, adjusted EBITDA margins in excess of 45%, and retained cash flow/debt improving to 25%.

Downward pressure on the rating could materialize if: (1) HKT Limited loses its leading market positions in Hong Kong; (2) the cooperation between PCCW's IPTV business and HKT Limited decreases; or (3) HKT Limited pursues an aggressive distribution and investment strategy that results in its debt levels rising.

Specific indicators for a rating downgrade include: (1) adjusted debt/EBITDA exceeding 3.75x; or (2) adjusted EBITDA margins of less than 35%.

We will also consider the actions of PCCW and any negative impact on the credit profiles of Hong Kong Telecommunications and HKT Limited.

The principal methodology used in this rating was Global Telecommunications Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Hong Kong Telecommunications (HKT) Limited — the former incumbent integrated telecommunications provider in Hong Kong — is wholly owned by HKT Group Holdings Limited, which in turn is wholly owned by HKT Limited.

HKT Limited is 63%-owned by PCCW Limited.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nidhi Dhruv
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Laura Acres
Associate Managing Director
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (852) 3551-3077

Moody's assigns Baa2 to HKT's senior unsecured guaranteed notes; outlook stable
No Related Data.
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