Hong Kong, January 06, 2021 -- 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 for SK Hynix is negative.
SK Hynix will use the proceeds from the notes for general corporate purposes,
including the repayment of outstanding borrowings and capital expenditures,
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 reflect 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 standalone
credit quality," says Sean Hwang, a Moody's Assistant Vice
President and Analyst.
"At the same time, the ratings also take 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 planned $9 billion acquisition of Intel
Corporation's (A1 stable) NAND memory and storage business will strengthen
SK Hynix's competitive position in the global memory chip industry,
but at the expense of an increase in debt leverage over the next 12-18
months.
Moody's expects SK Hynix's adjusted debt/book capitalization to increase
to 23%-25% in 2021 from around 21% at the
end of 2020, while adjusted debt/EBITDA will remain broadly stable
at 0.8x-1.0x on a proforma basis. These ratios
are at the weak end of SK Hynix's current standalone credit quality.
This proforma projection incorporates Moody's assumption that SK
Hynix will need around KRW4 trillion in new debt during 2021 to partly
fund the $7 billion first-phase consideration likely due
in the late part of the year.
At the same time, Moody's expects conditions in the global
memory chip industry to continue to improve in 2021, supported by
growing demand from smartphone and data server customers. As a
result, Moody's expects SK Hynix's adjusted EBITDA will
reach KRW19 trillion in 2021, on a pro forma basis, including
the full-year contribution of Intel's NAND business.
That said, uncertainties remain over this expected industry recovery
and the size of SK Hynix's free cash flow. Weaker-than-expected
cash flow and higher acquisition debt would lead to a steeper deterioration
in SK Hynix's debt leverage than Moody's currently expects.
These uncertainties drive the company's current negative outlook.
In terms of environmental, social and governance (ESG) considerations,
the rating considers SK Hynix's increasingly aggressive investments and
shareholder distributions. However, the associated risks
are mitigated by Moody's expectation that the company will focus on increasing
its free cash flow generation over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could return to stable if SK Hynix improves its earnings and
controls its investments, thereby curbing a significant further
debt increase. Specifically, Moody's would consider a change
in outlook to stable if adjusted debt/EBITDA falls below 1.0x on
a sustained basis and debt/capitalization remains below 23%-25%.
Moody's could downgrade SK Hynix's ratings if its financial profile weakens
further due to persistently weak profitability, aggressive shareholder
distributions, or a heavy use of debt for the upcoming acquisition
of Intel's NAND business, such that adjusted debt/EBITDA remains
above 1.0x or debt/capitalization stays above 23%-25%.
The ratings could also be downgraded 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 these ratings was Semiconductor Methodology
published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1248106.
Alternatively, 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,
mainly DRAM and NAND flash memory. It is 20.1% owned
by SK Telecom 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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
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The first name below is the lead rating analyst for this Credit Rating
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Sean Hwang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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China (Hong Kong S.A.R.)
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Chris Park
Associate Managing Director
Corporate Finance Group
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Client Service: 852 3551 3077
Clement Wong
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
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Moody's Investors Service Hong Kong Ltd.
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