Moody's Investors Service says that government support will remain a key rating driver for Korea's three railway entities, which are controlled by the Korean government (Aa2 stable), and major policy changes towards the sector are unlikely over at least the next 2-3 years.
“The three state-controlled railway entities will likely receive extraordinary support from the Korean government, if needed, given their strategic importance and the risk of contagion if one defaulted,” says Mic Kang, a Moody's Vice President and Senior Analyst.
The three are the Korea Rail Network Authority (KRNA, Aa2 stable), Korea Railroad Corporation (Korail, Aa2 stable), and SR Co., Ltd. (A2 stable).
“As such, KRNA's and Korail's ratings will likely remain close to the government's, despite both entities' weak financial profiles. SR's rating also reflects six notches of uplift from its weak standalone credit profile, owing to likely support from Korail, its parent, and the government, if needed,” says Kang.
Kang was speaking on Moody's recently-released sector-in-depth report on Korea's railway sector, “Railways — Korea: Government Commitment Drives Strong Credit Profiles and Sector Stability.”
The government's plan to expand railway networks and increase railway usage bolsters the strategic importance of the three entities and the government's commitment to the sector.
Moody's believes that KRNA, Korail and SR will execute the government's plan to enhance and improve Korea's railway network because it will be difficult for the private sector to carry out such work, given the high cost, long payback periods, and low commercial viability of many government-initiated projects.
Moody's also notes that the government will likely aim to improve the efficiency and profitability of the sector by streamlining the operations of the three, rather than by major reforms, such as privatization.
Meanwhile, the policy roles of KRNA, Korail and SR will likely keep their financial profiles moderate to weak.
KRNA's major source of revenue — the railway usage fees paid by Korail and SR — will likely remain insufficient to cover its expenses and capital expenditures. But the government's significant regular cash contributions mitigate KRNA's weak level of cash generation from operations.
Korail's baseline credit assessment of b1 and SR's standalone credit profile, which is six notches lower than its rating, are not investment-grade.
Korail's operating cash flows are weak and its debt leverage is high. And SR has material exposure to the ramp-up and demand risk associated with its newly extended high-speed railway line, which is scheduled to start operations in late 2016.
However, Moody's believes — as indicated — that the government will take any necessary steps to maintain the operational and financial stability of the three.
“SR's rating is three notches below that of Korail, reflecting its moderate level of strategic importance to the economy — relative to Korail — the absence of special legislation for the company, as exists for Korail and which indicates a stronger likelihood of government support for the latter, and significant ramp-up and demand risk,” adds Kang.
The material has been provided by InstaForex Company – www.instaforex.com