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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

30 Mar 2015

NOTE: On April 1, 2015, the press release was corrected as follows: The following paragraphs were added as the 23rd to 25th paragraphs of the press release:

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.

Revised release follows.

Hong Kong, March 30, 2015 -- Moody's Investors Service has assigned a Baa2 rating to HKT Capital No. 2 Limited's proposed USD senior unsecured notes due 2025.

HKT Capital No. 2 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

HKT Limited has reduced its total debt by HKD7.5 billion since June 2014 to HKD36.4 billion in FY2014.

We estimate adjusted debt/EBITDA at 3.9x in FY2014 (or 3.5x, assuming a full-year contribution from CSL), and expect it to fall within the 3.4-3.5x range in FY2015, benefitting from steady underlying growth in TSS and mobile, a full-year earnings contribution from CSL, and further cost synergies over the next 12 to 18 months.

"The proposed bond issuance will cause a temporary spike in HKT Limited's leverage as of June 2015, but since the proceeds will be used for refinancing, the impact on leverage will be neutral by end-2015," says Gloria Tsuen, a Moody's Vice President and Senior Analyst.

"However, the transaction will materially term out HKT Limited's debt maturity profile, a development which will be credit positive," adds Tsuen.

Moody's notes that HKT Limited's leverage remains high for its Baa2 rating, although that is mitigated by the company's strong operating profile and leading market positions in fixed line, broadband and wireless, which are further complemented by the leadership of its parent, PCCW Limited (unrated) in internet protocol TV (IPTV).

HKT Limited will refinance all its near-term debt maturities when they come due. It should have no need to increase its debt, in the absence of a fundamental shift in its business model or a major acquisition.

"HKT Limited's FY2014 results were in line with our expectations. Its revenue grew 26% year-on-year, and EBITDA grew 30% over the same period, reflecting stable performances from its telecommunications services segment, as well as the consolidation of CSL with its mobile business," adds Tsuen who is also Moody's Lead Analyst for HKT.

The stable outlook reflects our expectation that HKT Limited will maintain its leading market positions in all major segments and maintain adjusted debt/EBITDA of 3.0x-3.5x and adjusted EBITDA margin of approximately 40% on a sustained basis.

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

However, an 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 we will consider for an upgrade include: adjusted debt/EBITDA below 2.75-3.0x on a sustained basis, adjusted EBITDA margins above 45%, and retained cash flow/debt improving to 25%.

Downward pressure on the rating could materialize if (1) HKT Limited loses its leading position in the Hong Kong market; (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 elevated debt levels.

Specific indicators that we would look for include: (1) adjusted debt/EBITDA above 3.75x; or (2) adjusted EBITDA margins below 35%.

We will also consider the actions and acquisition appetite of PCCW and any resultant negative impact on the credit profiles of Hong Kong Telecommunications (HKT) Limited 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 63.07%-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.

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.

Gloria Tsuen, CFA
Vice President - Senior 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
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 Hong Kong Ltd.
24/F One Pacific Place
88 Queensway
Hong Kong
China (Hong Kong S.A.R.)
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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