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Rating Action:

Moody's assigns Baa2 to USD notes guaranteed by HKT

24 Sep 2019

Hong Kong, September 24, 2019 -- Moody's Investors Service has assigned a Baa2 rating to the proposed USD senior unsecured notes to be issued by HKT Capital No. 5 Limited, 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 HKT and its parent, HKT Group Holdings Limited (HKT Group).

The ratings outlook is stable.

HKT will use the bond proceeds for general corporate purposes, including the refinancing of existing debt.

RATINGS RATIONALE

HKT is an indirect and wholly owned subsidiary of HKT Group, which is in turn wholly owned by HKT Limited. Because HKT is HKT Limited's principal operating entity, Moody's considers HKT Limited's operating and financial metrics when assessing HKT's credit profile.

"The Baa2 rating reflects HKT's strong business profile, steady market shares, high profitability, high earnings stability and excellent liquidity," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.

HKT is the best-in-class quad-play telecommunications services provider in Hong Kong, together with its ultimate parent PCCW Limited, and holds leading market positions for all of the major services it provides, including fixed line, broadband, mobile and pay television.

These strengths mitigate the company's high financial leverage (including deferred spectrum obligations) and high dividend payouts. Moody's also expects HKT will manage down its leverage if it exceeds historically stable levels.

While HKT's parent, PCCW, has a weaker financial profile and ongoing investment needs, Moody's regards the associated risks as manageable, because it expects PCCW can raise funds independently without hurting HKT's financial health.

The proposed bond issuance will not have a material impact on HKT Limited's leverage as the proceeds will be used primarily for refinancing. In fact, the transaction will extend HKT Limited's debt maturity profile and will therefore be credit positive.

Moody's expects that HKT Limited's adjusted debt/EBITDA will remain 3.9x-4.0x in 2020 and 2021, similar to the 3.9x recorded in 2018, as an increase in deferred spectrum obligations will likely be offset by cost efficiency measures.

In December 2018, HKT Limited renewed its 900 megahertz (MHz) and 1800 MHz spectrum holdings for HKD3.3 billion. In addition, Hong Kong will hold spectrum auctions for the 3.3 gigahertz (GHz) to 4.9 GHz bands in October and November 2019. Although the final prices have yet to be determined, Moody's expects they will likely be significantly lower than those of the 900MHz and 1800MHz renewals.

HKT Limited's liquidity is underpinned by its $277 million in cash and $1,174 million in undrawn facilities, both as of 30 June 2019. The company has no debt maturity before 2021, and has very strong access to the bank and debt capital markets.

In terms of environmental, social and governance (ESG) factors, the rating considers the increasing risk of customer data breaches for telecommunications operators. This risk is mitigated by HKT's high-quality network and ongoing investments in security measures, as well as the absence of material security breaches in recent years.

The rating also takes into account PCCW's majority ownership of HKT Limited, HKT Limited's high dividend payout ratio and ongoing related-party transactions.

However, these factors are mitigated by (1) PCCW's long history of maintaining financial health at HKT; (2) HKT Limited's trust structure, which provides clarity around dividend policies and the company's intention to limit cash upstreaming to PCCW to 100% of its adjusted funds flow; and (3) the public listing status of both HKT Limited and PCCW, which ensures transparency around related-party transactions.

The stable outlook reflects Moody's expectation that HKT will maintain leading market positions in all of its major segments, as well as its stable financial profile.

The rating could be upgraded if HKT retains its solid market positions in all its major segments and significantly improves its financial profile.

Specific metrics that Moody's will consider for an upgrade include (1) adjusted debt/EBITDA below 3.0x on a sustained basis; (2) an adjusted EBITDA margin above 40%; and (3) retained cash flow (RCF)/debt improving to 20%.

The rating could be downgraded if (1) HKT loses its leading market position; (2) there is a material weakening in PCCW's credit quality, increasing the risk that PCCW extracts excessive cash from HKT; or (3) HKT Limited pursues an aggressive distribution and investment strategy that results in elevated debt levels.

Specific metrics that Moody's will consider for a downgrade include (1) adjusted debt/EBITDA above 3.8x-4.0x; or (2) an adjusted EBITDA margin below 32%.

The principal methodology used in this rating was Telecommunications Service Providers published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Hong Kong Telecommunications (HKT) Limited, the ex-incumbent integrated telecommunications provider in Hong Kong, is wholly owned by HKT Group Holdings Limited. HKT Group is in turn wholly owned by HKT Limited, which is 51.97%-owned by PCCW Limited.

HKT Group consolidates all of PCCW Limited's telecommunications-related assets, including fixed-line voice, broadband, international telecommunications, and mobile services. These businesses, along with PCCW 's media business, form the quadruple-play service.

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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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
VP - Senior Credit Officer
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

No Related Data.
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