Hong Kong, January 05, 2023 -- Moody's Investors Service has assigned a Baa2 rating to the proposed senior unsecured notes to be issued by SK Hynix Inc. (Baa2 stable).
The rating outlook for SK Hynix is stable.
SK Hynix will use the proceeds from the notes for general corporate purposes, including repayment of outstanding borrowings and capital expenditure, and -- in the case of the green bond tranche -- for eligible projects that meet SK Hynix's green financing framework.
RATINGS RATIONALE
"SK Hynix's Baa2 ratings are underpinned by its solid position as the world's second-largest memory chip producer and its track record of maintaining a robust balance sheet. These strengths offset the risks associated with the high cyclicality, large investment and continuous technology development required to stay competitive in the memory chip industry and SK Hynix's high reliance on dynamic random-access memory (DRAM) for profit generations" says Sean Hwang, a Moody's Assistant Vice President and Analyst.
Moody's expects SK Hynix's adjusted EBITDA to more than halve in 2023 from the approximate KRW23 trillion in 2022 (Moody's estimate) because of weakening conditions in the global memory chip industry. SK Hynix's shipments and selling prices will likely remain depressed, at least over the next couple of quarters, due to subdued consumer spending on technology products such as laptops and smartphones, and heightened macroeconomic uncertainty, which is leading to data server customers adopting a conservative purchasing behavior.
That said, SK Hynix's earnings should recover meaningfully in 2024 because large data server customers will increase their orders again as their memory-chip inventories run low, and secular drivers such as growing cloud computing, 5G smartphones and rising memory content per device remain intact. The slowing growth in supply by key producers, including SK Hynix, will also help restore the supply-demand balance.
Despite SK Hynix's weaker earnings, Moody's expects the increase in the company's adjusted debt to be moderate in 2023 because of a substantial reduction in capital spending.
Given the above considerations, SK Hynix's adjusted debt/EBITDA will likely weaken to around 2.5x in 2023 from 1.0x for the 12 months ended September 2022. Moody's expects the leverage ratio to return to around or below 1.5x in 2024 as earnings and cash flow recover. These expected 2024 financial metrics would be supportive of SK Hynix's Baa2 ratings and stable outlook.
In terms of environmental, social and governance (ESG) considerations, SK Hynix is exposed to moderately negative environmental risk associated with its energy-intensive production process as well as the inherent physical climate risk. In terms of governance, SK Hynix's ownership is concentrated in its largest shareholder SK Square Co., Ltd., with the latter having meaningful influence over the former's board and key business decisions, in Moody's opinion.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable rating outlook reflects Moody's view that SK Hynix will significantly curtail its capital spending and prevent a substantial weakening in its capital structure through the current downcycle, and that the company will ultimately restore its financial metrics to a level commensurate with its ratings once its earnings recover.
Moody's could upgrade the rating over time if SK Hynix significantly improves its market position and narrows its technology gap with the industry leader, Samsung Electronics Co., Ltd. (Aa2 stable); sustains strong profitability and positive free cash flow over industry cycles; and maintains conservative financial management, for example, through the maintenance of a net cash position.
Moody's could downgrade SK Hynix's rating if the company's financial profile weakens because of persistently weak profitability, further debt-funded acquisitions or aggressive shareholder distributions, such that adjusted debt/EBITDA rises above 1.5x, debt/capitalization stays above 25%-27% or liquidity holdings decline significantly on a sustained basis.
The ratings could also be downgraded if there is a significant erosion of SK Hynix's market position or delay in technological migration.
The principal methodology used in these ratings was Semiconductors published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74959. Alternatively, please see the Rating Methodologies page on https://ratings.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 Square Co., Ltd.
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 on https://ratings.moodys.com/rating-definitions.
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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.
Sean Hwang
Asst Vice President - 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
