14.07.2015, 11:29
Fitch Assigns KOGAS's USD Bond 'AA-(EXP)' Rating
OREANDA-NEWS. Fitch Ratings has assigned Korea Gas Corporation's (KOGAS, AA-/ Stable) proposed US dollar senior unsecured bond an expected rating of 'AA-(EXP)'. The bond will be issued under the company's global medium term note (GMTN) programme, which is also rated 'AA-'.
KOGAS will use the net proceeds from the bond to refinance existing debt and for general corporate purposes.
The notes are rated at the same level as KOGAS's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. However, the final rating is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Ratings Equalised With Sovereign: The ratings of KOGAS are equalised with those of South Korea due to their strong strategic and operational ties. The ratings also reflect KOGAS's status as an important state-owned enterprise in the country, with a dominant position in the natural gas business through its monopoly in the wholesale gas segment and its ownership of the country's entire gas transmission infrastructure.
Deterioration in Operating Performance: KOGAS's operating performance deteriorated in 2014 due to lower gas sales volume and a downward adjustment of the supply margin in the gas tariff formula. As a result, revenue fell 2% yoy and EBITDA fell 15%. Although revenue is likely to fall further in 2015 due to lower gas tariffs linked to lower oil prices, Fitch expects profit to improve due to the recent increase in the supply margin and the additional revenue contribution from the operations in Badra, Iraq, which began commercial production in 2H14.
Collection of Receivables: The government has reworked the wholesale tariff formula to enable KOGAS to collect receivables related to the five-year suspension of the cost pass-through system until 2017. The system was restarted in February 2013, and the outstanding amount, which peaked at KRW5.8trn in 2012, stood at KRW4.3trn at end-2014. Fitch expects continued collection of the receivables to contribute to the company's cash flow over the next three years.
Weak Standalone Credit Profile: KOGAS's standalone credit profile is weak for its rating level due to high debt levels. In 2014, the company's funds from operations (FFO) adjusted net leverage was 12.9x. Fitch expects KOGAS's debt levels to continue to rise over the next few years with negative free cash flow generation, but its credit metrics are likely to gradually improve from 2015 with stable core operations, reduced capex from 2015, and reduction in other receivables. KOGAS is designated a "highly indebted public entity" by the government. As such, its debt reduction plan and those of other major Korean state-owned entities are closely monitored by the government.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil price assumptions as per the Fitch Price Deck ("Revising Our Oil and Gas Price Assumptions", dated 8 June 2015);
- Capex to fall from 2015 onwards;
- Receivables related to the suspension of the cost pass-through system to be reduced by KRW1trn every year;
- Revenue to fall in 2015, reflecting reduced tariffs due to oil price decline.
RATING SENSITIVITIES
The issuer's rating is currently equalised with that of Korea.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A negative rating action on the sovereign.
- The government's inability to curtail the rate of increase in public-sector entities' debt, resulting in deterioration in the state's ability to provide timely and adequate support to key public-sector entities.
- Weakening of linkages with the state.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A positive rating action on the sovereign, provided that the rating linkages between KOGAS and the state remain intact and that the state's ability to support key state-owned entities remains strong.
For the sovereign rating of Korea, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 13 July 2015:
The main factors that, individually or collectively, could trigger positive rating action are:
- A convincing strategy to reduce the broader public debt burden, which would be reflected in lower debt to GDP ratios for the general government or state-linked enterprises
- Evidence that the economy can continue to grow over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the combined household balance sheet
The main factors that, individually or collectively, could trigger negative rating action are:
- An unexpected large rise in the public-sector debt burden caused by a deviation from the current prudent fiscal policy framework or crystallisation of financial sector or other contingent liabilities
- Evidence that GDP growth will be structurally lower than expected, potentially reflecting medium- to long-term challenges for Korea's economic model
KOGAS will use the net proceeds from the bond to refinance existing debt and for general corporate purposes.
The notes are rated at the same level as KOGAS's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company. However, the final rating is contingent upon the receipt of final documents conforming to information already received.
KEY RATING DRIVERS
Ratings Equalised With Sovereign: The ratings of KOGAS are equalised with those of South Korea due to their strong strategic and operational ties. The ratings also reflect KOGAS's status as an important state-owned enterprise in the country, with a dominant position in the natural gas business through its monopoly in the wholesale gas segment and its ownership of the country's entire gas transmission infrastructure.
Deterioration in Operating Performance: KOGAS's operating performance deteriorated in 2014 due to lower gas sales volume and a downward adjustment of the supply margin in the gas tariff formula. As a result, revenue fell 2% yoy and EBITDA fell 15%. Although revenue is likely to fall further in 2015 due to lower gas tariffs linked to lower oil prices, Fitch expects profit to improve due to the recent increase in the supply margin and the additional revenue contribution from the operations in Badra, Iraq, which began commercial production in 2H14.
Collection of Receivables: The government has reworked the wholesale tariff formula to enable KOGAS to collect receivables related to the five-year suspension of the cost pass-through system until 2017. The system was restarted in February 2013, and the outstanding amount, which peaked at KRW5.8trn in 2012, stood at KRW4.3trn at end-2014. Fitch expects continued collection of the receivables to contribute to the company's cash flow over the next three years.
Weak Standalone Credit Profile: KOGAS's standalone credit profile is weak for its rating level due to high debt levels. In 2014, the company's funds from operations (FFO) adjusted net leverage was 12.9x. Fitch expects KOGAS's debt levels to continue to rise over the next few years with negative free cash flow generation, but its credit metrics are likely to gradually improve from 2015 with stable core operations, reduced capex from 2015, and reduction in other receivables. KOGAS is designated a "highly indebted public entity" by the government. As such, its debt reduction plan and those of other major Korean state-owned entities are closely monitored by the government.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil price assumptions as per the Fitch Price Deck ("Revising Our Oil and Gas Price Assumptions", dated 8 June 2015);
- Capex to fall from 2015 onwards;
- Receivables related to the suspension of the cost pass-through system to be reduced by KRW1trn every year;
- Revenue to fall in 2015, reflecting reduced tariffs due to oil price decline.
RATING SENSITIVITIES
The issuer's rating is currently equalised with that of Korea.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
- A negative rating action on the sovereign.
- The government's inability to curtail the rate of increase in public-sector entities' debt, resulting in deterioration in the state's ability to provide timely and adequate support to key public-sector entities.
- Weakening of linkages with the state.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
- A positive rating action on the sovereign, provided that the rating linkages between KOGAS and the state remain intact and that the state's ability to support key state-owned entities remains strong.
For the sovereign rating of Korea, the following sensitivities were outlined by Fitch in its Rating Action Commentary of 13 July 2015:
The main factors that, individually or collectively, could trigger positive rating action are:
- A convincing strategy to reduce the broader public debt burden, which would be reflected in lower debt to GDP ratios for the general government or state-linked enterprises
- Evidence that the economy can continue to grow over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the combined household balance sheet
The main factors that, individually or collectively, could trigger negative rating action are:
- An unexpected large rise in the public-sector debt burden caused by a deviation from the current prudent fiscal policy framework or crystallisation of financial sector or other contingent liabilities
- Evidence that GDP growth will be structurally lower than expected, potentially reflecting medium- to long-term challenges for Korea's economic model
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