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Announcement:

Moody's says PCCW's bond issuance has no impact on HKT's rating

 The document has been translated in other languages

12 Apr 2012

Hong Kong, April 12, 2012 -- Moody's Investors Service says that there is no impact on Hong Kong Telecommunications (HKT) Limited's (HKT) Baa2 rating following the announcement that its ultimate majority shareholder, PCCW Limited (PCCW), plans to issue a US$-denominated 10-year bond.

The rating outlook remains stable.

PCCW currently owns a 65.5% stake in HKT Limited, which wholly owns HKT Group Holdings Limited (HKT Group), which in turn wholly owns HKT.

It is Moody's view that the proceeds of the bond issue, estimated to be US$300 million, will be used to provide long term capital rather than for any near term acquisition purposes or shareholder returns. The bond, while raised through an SPV, will be unconditionally and irrevocably guaranteed by PCCW.

PCCW will ultimately rely on cash distributions from HKT Limited, which are in turn to be largely funded by cash dividends from HKT, to service interest on the bonds. However the ability to draw cash out of HKT Limited is a function of its Adjusted Funds Flow, essentially a pre-determined formula capping distributions at EBITDA minus capex and customer acquisition costs, taxation, net finance costs and changes in working capital. The formula also allows for debt repayment if required. It is expected that the cash distribution from HKT Limited for 2012 will be not less than HK$2,574 million of which PCCW will receive a pro rata share.

"While the proposed bond issuance has no impact on HKT's Baa2 rating, Moody's would be concerned should PCCW seek to raise additional indebtedness such that the need for cash distributions from HKT Limited creates a drag on HKT's financial profile," says Laura Acres, a Moody's Vice President and Senior Credit Officer.

"Given PCCW's commitment to maintain its 2010 dividend payout level until at least 2013, there is little headroom under its debt servicing capability to raise additional debt over and above the proposed bond issuance," adds Acres, also Moody's Lead Analyst for HKT.

Notwithstanding the protections afforded by the Adjusted Funds Flow formula and the separate listing to HKT Limited and ultimately HKT, Moody's remain cognizant that HKT is classified as a Principal Subsidiary under the proposed bond issue and that a cross acceleration clause will be triggered should HKT default under its obligations, however the cross acceleration does not work in reverse such that a default by PCCW as guarantor under the proposed bonds will not trigger acceleration nor an event of default at the HKT level.

The proposed bonds also contain a change of control clause should PCCW cease to be the single largest shareholder in HKT Group.

The principal methodology used in rating Hong Kong Telecommunications (HKT) Limited was the Global Telecommunications Industry Methodology published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

HKT, the ex-incumbent integrated telecommunications provider in Hong Kong, is wholly owned by the HKT Group, which is majority owned by PCCW. HKT Group currently consolidates PCCW's telecommunications-related assets (fixed line, broadband, and mobile services), however it will continue to be a core part of PCCW's wider quadruple-play strategy, given the high degree of operational inter-dependence between the fixed line assets and pay-TV.

HKT is the principal operating subsidiary of HKT Limited and provides local telephony, international telecommunications, and local data and broadband services, as well as mobile services.

Laura Acres
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
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 says PCCW's bond issuance has no impact on HKT's rating
No Related Data.
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