Hong Kong, September 15, 2021 -- Moody's Investors Service has confirmed SK Hynix Inc.'s Baa2 issuer
and senior unsecured ratings. At the same time, Moody's has
changed the outlook on the ratings to negative from rating under review.
This rating action concludes the review for downgrade that Moody's
initiated on 16 June 2021, following SK Telecom Co.,
Ltd.'s (SKT) announcement that it would spin off its 20%
stake in SK Hynix into a new sister company, which will be named
SK Square Co., Ltd.
"The rating confirmation recognizes SK Hynix's strengthening competitive
position and its ability to maintain solid profitability and a healthy
financial leverage through the cycles. These factors will offset
the moderate adverse credit impact of the upcoming parent change,"
says Sean Hwang, a Moody's Assistant Vice President and Analyst.
"At the same time, the negative outlook mainly reflects a
degree of execution risk relating to the integration of Intel's
NAND business, as well as uncertainty over SK Hynix's ability
and willingness to reduce its debt starting 2022, after it completes
its acquisition of Intel's NAND business," says Hwang.
RATINGS RATIONALE
SK Hynix's Baa2 ratings are underpinned by the company's solid competitive
standing in the global memory-chip industry. The company's
long-standing number-two position in the oligopolistic dynamic
random-access memory (DRAM) segment of the industry will continue
to support its scale and high profit margins. The fact that SK
Hynix has maintained its adjusted EBITDA margin at 41% even during
the severe downcycle of 2019 evidences this strength.
In addition, the company's acquisition of Intel Corporation's
(A1 stable) NAND memory and storage business will lead to the company
becoming the second largest player in the NAND segment on a proforma basis.
Moody's believes that the competitive strength of the Intel NAND
business in enterprise solid-state drives (SSDs) will complement
SK Hynix's traditionally moderate presence in that product category,
strengthening its product portfolio.
The currently favorable conditions in the global memory chip industry
will likely soften slightly over the next 12 months, but remain
robust relative to 2019's levels. Moody's expects the
still-robust demand from data center customers, along with
growing memory content in servers and mobile devices and the low inventory
levels of memory-chip suppliers, will offset the slowing
demand from PC and smartphone producers.
As a result, Moody's expects SK Hynix's adjusted EBITDA margin will
remain healthy at around 50% and its adjusted EBITDA will grow
to around KRW22 trillion - KRW23 trillion in 2021-22 from
KRW14.5 trillion in 2020, assuming the completion of the
acquisition of Intel's NAND business at 31 December 2021.
In terms of debt levels, Moody's expects SK Hynix's adjusted
debt will increase to around KRW20.0 trillion at the end of 2021
from KRW12.9 trillion at the end of 2020, mainly as a result
of the $7 billion first-phase consideration for the Intel
NAND acquisition. Moody's expects SK Hynix will begin to
reduce its debt levels in 2022 based on free cash flow.
Given the above expectations, Moody's projects that SK Hynix's
proforma adjusted debt/EBITDA and debt/book capitalization will be around
0.8x-0.9x and 23%-24% in 2021-22,
respectively, compared with 0.9x-1.1x and 20%-21%
in 2019-20. This projected low leverage provides a key support
to SK Hynix's Baa2 ratings as it indicates financial capacity to
absorb the high cyclicality and investment needs associated with the memory-chip
industry.
That said, this projection is subject to downside risk, due
to uncertainties around industry conditions and SK Hynix's investment
strategy. The negative outlook reflects this risk.
In addition, SK Hynix's Baa2 ratings incorporate a moderate
likelihood of extraordinary support by its new parent-to-be
SK Square and the ultimate group holding company SK Inc, given SK
Hynix's strategic importance to the SK group.
In terms of environmental, social and governance (ESG) considerations,
the ratings consider SK Hynix's history of debt-funded investments
over the past three years. However, the associated risk is
mitigated by Moody's expectation that the company will focus on
increasing its free cash flow and reducing absolute debt levels starting
2022.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Given the negative outlook, an upgrade is unlikely. The outlook
could return to stable if SK Hynix demonstrates its ability and willingness
to maintain a strong financial profile by controlling its investment and
reducing debt levels, such that adjusted debt/EBITDA remains below
1.0x and debt/capitalization remains below 23%-25%.
Moody's could downgrade SK Hynix's ratings if its financial profile weakens
due to persistently weak profitability, further debt-funded
acquisitions or aggressive shareholder distributions, such that
adjusted debt/EBITDA rises 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.
The principal methodology used in these ratings was Semiconductors published
in September 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287886.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Based in Korea, SK Hynix Inc. designs, manufactures
and sells memory chips, mainly DRAM and NAND flash memory.
It was 20.1% owned by SK Telecom Co., Ltd.
as of 30 June 2021.
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Sean Hwang
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Hong Kong Ltd.
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Chris Park
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Client Service: 852 3551 3077
Releasing Office:
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