Hong Kong, June 16, 2021 -- Moody's Investors Service has placed SK Hynix Inc.'s Baa2
issuer and senior unsecured ratings on review for downgrade. At
the same time, Moody's has changed the outlook to ratings
under review from negative.
The review follows the announcement[1] by SK Hynix's parent,
SK Telecom Co., Ltd. (SKT), that it would spin
off its non-telecom investments, including its 20%
stake in SK Hynix, into a new sister company (tentatively called
SKT Investment Co., Ltd.). SKT plans to complete
the proposed spin-off by November 2021, subject to shareholder
approvals in October 2021.
"The review for downgrade reflects our view that SK Hynix's new
parent will be less able than SKT to provide extraordinary support.
Consequently, once the parent's split is substantially completed,
SK Hynix's ratings will likely no longer benefit from the explicit
one-notch uplift for potential extraordinary parental support,"
says Sean Hwang, a Moody's Assistant Vice President and Analyst.
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
Through its new parent, SK Hynix will remain a grandchild affiliate
of SK Inc. and maintain high strategic importance to SK Group.
However, any extraordinary support for SK Hynix under the new structure
will likely come through SKT Investment, which will have weaker
credit quality than SKT as it will not have SKT's strong telecom business.
SKT Investment's credit quality will largely mirror that of its
key asset, SK Hynix. SKT Investment's credit quality
will also reflect its strong standalone balance sheet and the likelihood
of extraordinary support from SK Inc.
Moody's expects SK Hynix's credit quality will continue to
benefit from the company's solid position as the world's second-largest
memory-chip producer, which will be further enhanced by its
acquisition of Intel Corporation's (A1 stable) NAND memory and storage
business. This competitive strength and the company's low
financial leverage offset its high reliance on dynamic random-access
memory (DRAM) chips for profit generation, as well as the high cyclicality
and capital intensity inherent in the memory chip business.
Conditions in the global memory chip industry will likely remain favorable
at least in 2021, supported by solid demand from smartphone and
data server customers. As a result, Moody's expects SK Hynix's
adjusted EBITDA to increase to around KRW23 trillion in 2021 on a pro
forma basis, including the estimated full-year contribution
of Intel's NAND business, from KRW14.5 trillion in 2020.
Assuming that SK Hynix will raise around KRW8 trillion in total new debt
during 2021 mainly to fund the $7 billion first-phase consideration,
Moody's expects SK Hynix's adjusted debt/book capitalization to increase
to 26% in 2021 from 20% at the end of 2020, while
adjusted debt/EBITDA will remain broadly stable at 0.9x on a pro
forma basis. These ratios are still largely consistent with SK
Hynix's standalone credit quality, albeit at the weak end of Moody's
expectations. SK Hynix will likely begin to reduce debt and improve
the ratios in 2022, but this assumption is uncertain.
Moody's review will focus on (1) the progress of SKT's spin-off
transaction and the extent that shareholder support will change as a result
of the parental change; and (2) SK Hynix's intention and ability
to deleverage after the Intel transaction, such that its adjusted
debt/EBITDA and debt/capitalization could remain below 1.0x and
23%-25%, respectively, on a sustained
basis.
Moody's will also further crystalize the positioning of SK Hynix's
standalone credit profile, taking into account the competitive and
financial impact of its planned acquisition of Intel's NAND memory
and storage business.
Moody's expects the magnitude of the potential downgrade resulting
from the review, if any, to be limited to one notch,
given SK Hynix's investment-grade standalone credit quality
and the company's strategic importance to SKT Investment and SK
Inc. A likelihood of extraordinary support from these entities
will provide a degree of support to SK Hynix's credit quality.
In terms of environmental, social and governance (ESG) considerations,
the ratings consider SK Hynix's increasingly aggressive investments and
shareholder distributions. However, Moody's expects that
the company will focus on increasing its free cash flow generation over
the next 12-18 months, which will mitigate the associated
risks.
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 was 20.1% owned by
SK Telecom Co., Ltd. as of March 2021.
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.
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REFERENCES/CITATIONS
[1] SKT's regulatory filing 10-Jun-2021
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The first name below is the lead rating analyst for this Credit Rating
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this Credit Rating.
Sean Hwang
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