KEC's BCA incorporates its dominant market position in Korea's toll road sector, strong access to debt markets and adequate financial metrics that are within Moody's expectations for its credit quality, despite the coronavirus-related disruptions and slowing economy.
But the BCA is constrained by the low visibility into toll rate adjustments and the increase in KEC's capital spending to construct new toll road projects.
Moody's expects KEC's funds from operation (FFO) to adjusted debt ratio will fall to 5%-7% over the next 12-18 months from 7.1% in 2019, mainly because of a low to mid-single digit percentage decline in traffic volume amid the coronavirus outbreak in 2020 and an increase in debt to fund capital spending for new toll road projects.
Still, these credit metrics will likely continue to position KEC's BCA at baa2.
Moody's has also considered the following environmental, social and governance (ESG) factors.
First, KEC's exposure to environmental risk is low, because traffic volumes in Korea will continue to be mainly driven by the economic activities, business sentiment, leisure activities and population growth.
Second, Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
The rapid and widening spread of the coronavirus outbreak globally, the deteriorating Korean and global economic outlooks, falling oil prices and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The toll road sector in Korea has been affected by the shock given its sensitivity to consumer demand and sentiment.
Third, KEC's debt funding to cover part of the capital spending required to construct new toll roads will increase. However, this concern is mitigated by the tight supervision by the Korean government and the government's extraordinary support.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The stable outlook on KEC's ratings is in line with the stable outlook on the Korean government's rating, and reflects Moody's expectation that the company's strategic importance to and strong support from the government, if and when needed, will remain intact over at least the next 12 to 18 months.
An upgrade of Korea's sovereign rating will likely trigger a review of KEC's ratings. KEC's BCA could be upgraded if its FFO/debt exceeds around 7% on a sustained basis.
A downgrade of Korea's sovereign rating will result in a downgrade of KEC's ratings. In addition, the company's rating could be downgraded if there are significant adverse changes in its relationship with the government or in its policy role.
KEC's BCA could be downgraded if its FFO/debt falls below 5% on a sustained basis. However, such a weakening in KEC's credit metrics would not have an immediate impact on its ratings because of the very high likelihood of extraordinary support from the government, which provides a buffer to the company's ratings.
The methodologies used in these ratings were Privately Managed Toll Roads published in October 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1096736, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
Korea Expressway Corporation (KEC, Aa2 stable) constructs, manages and operates Korea's expressway network. KEC is more than 99% owned by the Government of Korea (Aa2 stable) directly or indirectly.
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.
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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
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.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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
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