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Rating Action:

Moody's upgrades SR Co's issuer rating to A1; outlook stable

 The document has been translated in other languages

29 Oct 2019

Hong Kong, October 29, 2019 -- Moody's Investors Service has upgraded SR Co., Ltd.'s issuer rating to A1 from A2.

At the same time, Moody's has revised the outlook on the rating to stable from positive.

RATINGS RATIONALE

"The rating upgrade reflects our expectation for continued robust growth of SR's average daily passengers and strong credit metrics, both factors of which support SR's credit quality under the stable market structure of Korea's railway operating sector," says Mic Kang, a Moody's Vice President and Senior Credit Officer.

Moody's expects SR's annual average daily passengers to be at a sustainable 62,000-65,000 over the next 12-18 months, which will be higher than the 62,000-63,000 recorded for the first nine months of 2019, and 53,000-62,000 recorded in 2017-18. The solid passenger numbers will help the company generate steady profits.

The sustainable level of passengers indicates that SR will generate steady profits under its stable market position in Korea's (Aa2 stable) railway operating sector, following the completion of its ramp-up since its commencement of operations in December 2016.

Moody's projects that SR will continue to register a strong adjusted debt to EBITDA of around 3.0x-3.3x in 2019-20, providing support for the rating. In addition, SR's retained cash flow (RCF)/net debt — excluding cash likely to be used to fund its expansionary capital spending — will stand solid at 50%-60% in 2019-20.

Such credit metrics will strongly position SR's credit quality in the A1 rating category. SR's solid financial strength, which is also supported by likely ample cash holdings of KRW200--KRW250 billion during 2H 2019--1H 2020, will mitigate the adverse impact of its increasing capital spending and operating costs.

SR's capital spending in 2020 will likely be much higher than the KRW35--KRW40 billion in 2017-18, because it plans to place an order to purchase new rolling stock, which will be used to serve the growing demand for high-speed railways. The company's operating costs will also increase, because of the rising maintenance needs for its rolling stock under the Korean government's stringent safety requirements. The higher costs will unlikely be timely offset by passenger fares, given the low visibility into fare adjustments.

SR's A1 rating incorporates a six-notch uplift from its standalone credit strength.

Today's rating action reflects a strengthening in the standalone credit strength.

The standalone credit strength factors in (1) the company's solid passenger numbers; (2) its strong position in the stable railway operating sector; (3) its strong credit metrics; (4) the small scale of its operations; (5) short operational track record; and (6) the low visibility into fare adjustments.

The uplift reflects the strong commitment of SR's parent, Korea Railroad Corporation (Korail, Aa2 stable) in supporting SR, as demonstrated by (1) Korail's provision of put options to SR's public institution shareholders, the Teachers' Pension, Industrial Bank of Korea (Aa2 stable), and Korea Development Bank (Aa2 stable), with the options allowing the shareholders to sell their stakes in SR to Korail; and (2) the two companies' shared operating platform, and strategic importance to the Korean government.

Moody's expects that the Korean government's commitment to SR will remain strong, because (1) SR was established through government's initiatives, and will remain ultimately controlled by the government through the government-owned, Korail, and/or public institution shareholders; (2) SR's operating performance will be used as a benchmark to improve Korail's operating efficiency and profitability through in-house competition; and (3) SR will continue to undertake the government's objectives of serving high-speed railway passengers travelling to and from the southern part of Seoul and its surrounds, as well as enhancing railway network capacity to cater to growing demand.

The stable rating outlook reflects Moody's expectation that the strong support from Korail and the government to SR will remain intact, and that SR's credit metrics will stay within Moody's rating expectations over the next 12-18 months, given the company's solid annual average daily passengers and ample cash holdings.

Moody's could upgrade SR's rating if its links to Korail or strategic importance to the Korean government strengthens.

SR's standalone credit strength will improve, if its track record of solid operations is enhanced; and if its credit metrics remain at strong level, including adjusted debt/EBITDA and retained cash flow (RCF)/net debt staying at around 3.5x and 40% respectively on a sustained basis. In such a scenario, an upgrade of SR's rating will depend on Moody's assessment then of its strategic importance to the Korean government and its relationship with Korail.

A downgrade of Korail's or Korea's rating could result in a downgrade of SR's rating. Moreover, a weakening of SR's relationship with Korail or its standalone credit strength could pressure SR's rating.

SR's standalone credit strength could come under pressure if significant downside risk associated with average daily passengers, average fares and/or cost structure emerges; or if adjusted debt to EBITDA exceeds 4.5x and/or RCF/net debt falls below 15% on a sustained basis.

In terms of environmental, social and governance factors, SR's exposure to environmental risk is low, because transport through passenger railway is environmentally cleaner and more energy efficient than other travel options such as private passenger vehicles.

Its exposure to social risk — mainly from human capital risk and safety issues — is mitigated by the Korean government's oversight on strategically important infrastructure operations, and the company's measures to satisfy stringent safety requirements.

Governance risk is generally not a key driver for state-owned or controlled companies such as SR, which are strategically important to Korea's economy and the public, because such companies are tightly supervised by the Korean government, with the government's institutional strength in turn determined by Moody's at "Very high".

The principal methodology used in this rating was Global Passenger Railway Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Established in December 2013, SR Co., Ltd. is a high-speed passenger railway operator for Korea's two major nationwide high-speed railway lines: Gyeongbu (401.2 km) and Honam (354.2 km) through a new high-speed railway line (61.1 km) that connects SR's three major stations located in the southern part of Seoul to the nationwide lines.

At 30 June 2019, SR was 41.0% owned by Korea Railroad Corporation, with the latter constituting SR's single-largest shareholder. The remaining stakes were held by Korea's Teachers' Pension (31.5%), Industrial Bank of Korea (15.0%, Aa2 stable) and Korea Development Bank (12.5%, Aa2 stable), all of which are public institutions.

REGULATORY DISCLOSURES

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.

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.

Mic Kang
VP - Senior Credit Officer
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
Client Service: 852 3551 3077

Terry Fanous
MD-Public Proj & Infstr Fin
Project & Infrastructure Finance
JOURNALISTS: 852 3758 1350
Client Service: 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
Client Service: 852 3551 3077

No Related Data.
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