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Rating Action:

Moody's upgrades Korea's eight infrastructure and corporate GRIs to Aa2; outlook stable

 The document has been translated in other languages

21 Dec 2015

Hong Kong, December 21, 2015 -- Moody's Investors Service has upgraded to Aa2 from Aa3 the ratings of the following eight core Korean government related issuers (GRIs) and changed to stable from positive their rating outlooks:

• Korea Expressway Corporation, Aa2 senior unsecured rating, and (P)Aa2 MTN rating

• Korea Gas Corporation, Aa2 issuer and senior unsecured ratings, and (P)Aa2 MTN rating

• Korea Land and Housing Corporation, Aa2 issuer and senior unsecured ratings, and (P)Aa2 MTN rating

• Korea National Oil Corporation (KNOC), Aa2 issuer and senior unsecured ratings, and (P)Aa2 MTN rating

• Korea Rail Network Authority, Aa2 issuer rating

• Korea Railroad Corporation, Aa2 issuer and senior unsecured ratings

• Korea Resources Corporation (Kores), Aa2 issuer and senior unsecured ratings, and (P)Aa2 MTN rating

• Korea Water Resources Corporation, Aa2 issuer and senior unsecured ratings

Moody's has also upgraded to Aa2 from Aa3 the senior unsecured bond rating -- and changed the ratings outlook to stable from positive -- for the bonds issued by Minera y Metalúrgica del Boleo, S.A.P.I. de C.V. and guaranteed by Kores.

These rating actions follow Moody's decision on 18 December 2015 to upgrade to Aa2 from Aa3 the Korean government's issuer and senior unsecured ratings. Moody's also changed the ratings outlook to stable from positive.

Moody's has also affirmed Korea District Heating Corporation's (KDHC) A1 issuer and senior unsecured ratings and (P)A1 MTN rating with a stable outlook.

At the same time, Moody's has lowered KNOC's baseline credit assessment (BCA) to ba3 from ba2.

RATINGS RATIONALE

"The rating upgrade for the eight core GRIs, which exclude KDHC, reflects Moody's recognition that the Korean government's own improving credit profile will benefit their credit quality, given the very high likelihood of the government's timely support to the GRIs, if and when needed," says Mic Kang, a Moody's Vice President and Senior Analyst.

Moody's believes that the credit quality of these core GRIs will remain closely linked to that of the government, because of their high strategic importance and strong policy functions in their respective sectors, which are mainly utilities, infrastructure, real estate and energy.

Moody's also considers that the government's tolerance for disruptions at the GRIs will remain very low, given a high level of reputational and contagion risk, particularly regarding funding access for various Korean issuers and the sovereign itself, should a core GRI encounter financial or operating difficulties.

In addition, the government has established a track record of closely managing the GRIs' financial health since the introduction of its mid-to-long-term plans for the financial management of public institutions in 2012 -- indicating its commitment to preventing the GRIs from entering any degree of financial distress -- and will likely continue to monitor progress at each entity in terms of their budgets and funding on a periodic basis.

The stable ratings outlooks are in line with that of the government's ratings. It reflects Moody's expectation that the GRIs' strategic importance to and strong support from the government, if and when needed, will remain intact.

An upgrade of Korea's sovereign rating could trigger an upgrade of the eight GRIs' ratings.

A downgrade of Korea's sovereign rating will result in a downgrade of the eight GRIs' ratings.

In addition, Moody's would review the ratings in the event of significant adverse changes in the GRIs' relationships with the government and their policy roles.

The change in KNOC's BCA to ba3 from ba2 reflects Moody's recent material downward revision of its oil price assumptions. Moody's assumes global crude oil price to remain below $50 a barrel over the next 1-2 years, which will pressure KNOC's profitability and cash flow, given the company's high exposure to the oil and gas exploration and production business.

As a result, despite KNOC's efforts to curb excessive growth in its debt, we expect its financial leverage to remain high at least over the next 1-2 years.

However, KNOC's ratings will continue to be closely linked to Korea's sovereign rating because of the very high likelihood of extraordinary, timely governmental support, reflecting its status as a core GRI.

"Meanwhile, the greater gap in the ratings between the core GRIs and KDHC mainly takes into account KDHC's relatively moderate level of strategic importance to the economy, and the absence of special legislation for the company which would indicate a very high likelihood of support," adds Kang.

KDHC's ratings would come under upward pressure if the government's ability to provide support further strengthens and/or the government provides stronger forms of legal support. In addition, KDHC's ratings would be upgraded if the company improves its BCA, such that its funds from operation (FFO)/debt or FFO/interest ratio exceeds 13%-15% or 4.5x-4.7x on a sustained basis.

A material downgrade of Korea's rating could lead to a downgrade of KDHC's ratings. Moreover, a significant weakening in the company's relationship with the government -- as evidenced by lower government ownership and a weaker public role -- could also pressure the rating. In addition, KDHC's rating would come under pressure if its FFO/debt or FFO/interest falls below 2.5x-3.0x or 7%-8% over the cycle.

The principal methodologies used in rating Korea Gas Corporation and Korea District Heating Corporation were Regulated Electric and Gas Utilities published in December 2013, and Government-Related Issuers published in October 2014. The principal methodologies used in rating Korea Expressway Corporation were Privately Managed Toll Roads published in May 2014, and Government-Related Issuers published in October 2014. The principal methodology used in rating Korea Land and Housing Corporation, Korea Rail Network Authority, and Korea Resources Corporation was Government-Related Issuers published in October 2014. The principal methodologies used in rating Korea National Oil Corporation were Global Independent Exploration and Production Industry published in December 2011, and Government-Related Issuers published in October 2014. The principal methodologies used in rating Korea Railroad Corporation were Global Passenger Railway Companies published in March 2013, and Government-Related Issuers published in October 2014. The principal methodologies used in rating Korea Water Resources Corporation were Global Regulated Water Utilities published in December 2009, and Government-Related Issuers published in October 2014. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Korea Expressway Corporation, as a 99.98% government-owned company, is mandated with the responsibility to construct, manage and operate Korea's network of expressways.

Korea Gas Corporation, as Korea's only fully-integrated natural-gas company, holds a near monopoly over the import, transmission, and wholesale of natural gas in Korea. Kogas was 55%-owned by the Korean government, directly and indirectly, as of 30 September 2015.

Korea Land and Housing Corporation, as a 100% state-owned entity, is charged with implementing land and housing-related policies in Korea. Its key business areas are: (1) to construct and supply affordable housing; (2) to develop and supply residential land, and to develop towns and cities; (3) to develop and supply industrial complexes; and (4) to manage land bank.

Korea National Oil Corporation (KNOC) is a 100% government-owned upstream exploration and production company. KNOC is engaged in the exploration and development of oil and gas fields, oil stockpiling for strategic purposes, and the on-lending of funds from the Special Accounts for Energy and Resources.

Korea Rail Network Authority is an entity established solely with contributed capital from the Korean government. It executes the government's policies on railroad infrastructure by constructing, managing and upgrading the country's conventional and high-speed rail networks.

Korea Railroad Corporation is responsible for railroad operations in Korea. It is 100%-owned by the Korean government. The Korail Act requires the government to inject 100% of the company's paid-in capital.

Korea Resources Corporation is 100% owned by the Korean government. The company is tasked with implementing national mineral resources-related policies in order to promote stability in the country's procurement of such resources.

Korea Water Resources Corporation operates a state-owned water utility in Korea and is 100% owned, directly and indirectly, by the Korean government.

Korea District Heating Corporation (KDHC) is the country's largest provider of urban heating services, with a market share of around 55% for all district heating customers at September-2015. The government has a 75% direct and indirect stake in KDHC.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

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.

Mic Kang
Vice President - Senior Analyst
Project & Infrastructure Finance
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

Terry Fanous
MD-Public, Proj & Infstr Fin
Project & Infrastructure Finance
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 upgrades Korea's eight infrastructure and corporate GRIs to Aa2; outlook stable
No Related Data.
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