OREANDA-NEWS. S&P Global Ratings said today that it had affirmed its 'A-' long-term corporate credit rating on Korea-based telecommunications provider SK Telecom Co. Ltd. (SKT). The outlook is stable. At the same time, we affirmed our 'A-' long-term issue ratings on SKT's senior unsecured notes.

We affirmed the rating because we expect SKT to maintain its overall credit quality following the Korean regulator's disapproval of the company's proposed share acquisition in CJ HelloVision (CJHV).

On July 18, 2016, Korean Fair Trade Commission disapproved SKT's proposal to acquire a 30% stake in CJHV and merge the company with its own subsidiary SK Broadband Co. Ltd. (SKB). The regulator said this was mainly because the merger and acquisition (M&A) transaction could limit fair competition in Korea's pay TV market. The Ministry of Science, Information, Communication and Technology, Future Planning, and Korea Communications Commission are yet to endorse the disapproval. However, we believe it is highly likely that the M&A will be cancelled given the regulatory disapproval by the Fair Trade Commission.

We now expect SKT's financial metrics to be modestly better than we had earlier forecast mainly because there will be no cash outflows and debt increase related to the acquisition. Under our base-case scenario, we estimate SKT's fully adjusted debt-to-EBITDA ratio to be about 1.5x over the next two years, compared with our previous forecast of 1.6x-1.7x.

In our view, this event will constrain the enhancement in SKT's overall competitive position because the company will find it difficult to grow its media and pay TV business as fast as it had originally expected. Nonetheless, we expect SKB's Internet pay TV (IPTV) business to continue to grow solidly over the next two years, given the ongoing growth in media and telecommunication bundled services in Korea.

The stable outlook reflects our expectation that SKT's strong market position should allow it to continue to generate stable operating cash flows and maintain strong debt-servicing capacity over the next two years.

We could lower the ratings on SKT if we see operating profitability weaken substantially or larger-than-expected capital investments resulting in the company's adjusted debt-to-EBITDA ratio staying above 2.3x for a prolonged period. Also, the ratings could come under downward pressure if SKT materially increases its ownership in Hynix or makes other significant investments in noncore businesses.

We could raise our ratings on SKT if the company reduces financial risk while maintaining stable profitability and a prudent financial policy, resulting in its debt-to-EBITDA ratio (including and excluding pro-rata consolidation of Hynix) well below 1.5x on a sustainable basis.