OREANDA-NEWS. Fitch Ratings has affirmed Korea Water Resources Corporation's (K-water) Long-Term Foreign-Currency Issuer Default Rating (IDR) and foreign-currency senior unsecured rating at 'AA-'. The Outlook on the IDR is Stable.

K-Water's ratings and Stable Outlook reflect the company's strong ties with the South Korean government, its near-100% state ownership, and its status as the sole public entity for many water-related businesses.

KEY RATING DRIVERS
Rating Equalised with Sovereign: The ratings of K-water are equalised with that of Korea (AA-/Stable) due to strong strategic and operational ties. The ratings also reflect K-water's status as the sole public entity for many water-related businesses. The company aims to develop and manage Korea's water resources and to improve the quality of water. To achieve these objectives, K-water is mainly involved in the construction and management of multi-purpose dams and estuary barrages, and construction and management of multi-regional and industrial water supply systems and water supply dams. The company also receives tangible support from the government via capital injections and subsidies.

Government Support for Four River Project: The level of government support for debt incurred for the Four River Restoration Project (Four River Project) was decided during the National Policy Coordination Meeting in September 2015, with most of the project completed this year. It has been decided that the government would repay 30% of the KRW8trn principal of the Four River Project debt and continue to support the interest payment for the full amount. Although the government will not repay the full amount, the level of support extended under this decision underscores K-water's strong linkage with Korea sovereign.

Fitch expects K-water to also finalise in early 2016 its accounting treatment of the project, where the total investment to-date is now booked as an intangible asset, now that the government support level has been determined. Management has indicated that the company is likely to have to write off a major part of the KRW8trn investment in the 2015 statements.

Relatively Stable Core Operations: Fitch expects K-water's core operations to remain relatively stable. The hydro power generating business fluctuates depending on rainfall and is also likely to decline gradually as Korea gets more electricity supply from other sources. The water supply business is, however, likely to show low but stable growth. Fitch also expects revenue and profit from the industrial complex development to increase in the short term and revenue from the development of waterfront projects to kick in from 2017.

Weak Standalone Credit Profile: K-water's standalone profile remains weak for its state-linked rating level due to high debt levels, mostly incurred when it took a lead role in the Four River Project. The project is nearly complete, but Fitch expects the company to make additional investments to continue industrial complex development projects and waterfront projects in the area. The waterfront projects will help K-water to recoup part of the investments in the Four River Project. Fitch expects K-water's debt levels to continue to increase slightly over the next two to three years with those investments, and because the government support to repay 30% of the debt for the Four River Project will be spread out over 20 years.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for K-water include:
- Stable revenue from waterworks operations, slight decline in hydro power generation
- Partial write off of Four River Project-related assets in 2015
- Capex of KRW1.1trn for 2015-2017
- Annual government capital injection of KRW460bn-500bn from 2016
- No dividend payout in 2016 given the expected net loss in 2015 from asset write off.

RATING SENSITIVITIES
The issuer's rating is currently equalised with that of Korea.

Negative: 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: 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 K-water 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.