OREANDA-NEWS. Fitch Ratings has assigned Korea National Oil Corporation's (KNOC, AA-/ Stable) US dollar bonds a final rating of 'AA-'. The bonds were issued in two tranches; USD500m due 2021 and USD500m due 2026. The bonds were issued under the company's global medium-term note (GMTN) programme, which is also rated 'AA-'.

KNOC 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 KNOC's senior unsecured rating as they represent direct, unconditional, unsecured and unsubordinated obligations of the company.

The assignment of the final rating follows the completion of the bond issuance and receipt of documents conforming to the information previously received. The final rating is the same as the expected rating assigned on 5 April 2016.

KEY RATING DRIVERS
Ratings Equalised with Sovereign: KNOC plays a significant strategic and operational role. This entails the acquisition of oil and gas reserves, exploration and production activities to improve the country's self-sufficiency, and managing the country's oil reserves. Its operations are closely monitored by government.

Operations Affected by Low Oil Prices: KNOC's revenue and profitability deteriorated further in 2015, reflecting significantly lower oil prices than in 2014. The company's average selling prices for oil fell 46% and for gas dropped 33% in 2015. As a result, revenue fell by 21% and EBITDA by 46%. It also posted an operating loss of KRW445bn. Fitch expects the operating loss to widen in 2016, given our assumptions that average oil prices will remain lower than in 2015.

Asset Write-Offs: The company wrote off a significant portion of its assets - over KRW3.5trn - reflecting the lower-oil-price environment, and also reported a FX loss of around KRW500bn. As such, it reported a net loss of KRW4.5trn for the year.

Restructuring Efforts: KNOC has undertaken various cost-cutting efforts to improve its financial profile since 2015. It says it plans to implement additional measures, which includes headcount reduction, reducing capex, as well as the sale of its head office. However, we believe substantial improvement in its standalone credit profile will be difficult without a meaningful increase in oil prices.

Weakened Standalone Credit Profile: Fitch expects KNOC's standalone credit profile to remain substantially weaker than its IDR, which is driven by state linkages, because of expectations of weak oil prices in 2016 and only a modest increase over the next two to three years. We expect the company to continue to post negative FCF even with the significant cut in capex since 2015. FFO-adjusted net leverage rose to 11.2x in 2015 from 5.5x in 2014, and we expect net leverage to remain above 10x over the next two to three years.

KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- Oil prices in line with Fitch's base-case price deck, as outlined in the "Fitch Oil and Gas Assumptions Summary", dated 11 February 2016
- Production volume to fall by 9% in 2016
- Capex of KRW1.3trn in 2016-2018

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

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- 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 positive rating action include:
- Positive rating action on the sovereign, provided that the rating linkages between KNOC 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 2 February 2016:

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 and state-linked enterprises
- Evidence that the economy can grow at a relatively high rate over time, thereby narrowing the per-capita income gap with rating peers, without deterioration in the aggregate 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.