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Rating Action:

Moody's assigns Baa2 to notes guaranteed by HKT

07 Jul 2016

Hong Kong, July 07, 2016 -- Moody's Investors Service has assigned a Baa2 rating to the proposed USD senior unsecured notes due 2026 to be issued by HKT Capital No. 4 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, unrated).

The rating outlook is stable.

The bond proceeds will be used for general corporate purposes, including 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 (unrated). Because HKT is HKT Limited's principal operating entity, Moody's considers HKT Limited's operating and financial metrics when assessing HKT's credit risk profile.

"The Baa2 rating for the proposed notes reflects HKT Limited's strong business profile, with leading market positions in the fixed line, broadband and wireless markets in Hong Kong," says Gloria Tsuen, a Moody's Vice President and Senior Analyst. "Its strong market positions are complemented by the leadership of its parent, PCCW Limited, in internet protocol TV."

"On the other hand, the rating also reflects HKT Limited's relatively high leverage for a Baa2 rating level," adds Tsuen.

Moody's expects that HKT Limited's adjusted debt/EBITDA will increase slightly to 3.2x in 2016 from 3.1x in 2015, due to a lump sum $250 million 3G spectrum payment later this year. This ratio will fall gradually towards 3.1x by 2018, driven by EBITDA growth and the repayment of modest levels of debt.

HKT Limited reported sales growth in excess of 20% in each of 2014 and 2015 because of its acquisition of CSL New World Mobility Limited (CSL, unrated) in May 2014. Moody's expects that HKT Limited will return to a more normal growth profile of a 2% increase in revenue in 2016, while its adjusted EBITDA margins will remain stable in the 39%-40% range.

Both the mobile and fixed line/broadband segments — which represented around 40% and 60% of the company's revenues respectively in 2015 — will contribute evenly to the growth.

The impact on leverage from the proposed bond issuance will be neutral, because the proceeds will be used primarily for refinancing. On the other hand, the transaction will extend HKT Limited's debt maturity profile and will therefore be credit positive.

The stable rating outlook reflects Moody's expectation that HKT Limited will maintain its leading market positions in all major segments of the telecommunications market in Hong Kong and keep its adjusted debt/EBITDA at 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 Moody's will consider for an upgrade include: adjusted debt/EBITDA below 2.75x-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 Moody's will look for include: (1) adjusted debt/EBITDA above 3.75x; or (2) adjusted EBITDA margins below 35%.

Moody's 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 Ratings Methodologies 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 (unrated).

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 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.

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

Gary Lau
MD - Corporate Finance
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 notes guaranteed by HKT
No Related Data.
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