Fitch Assigns Korea Rail Operator SR 'A+' Rating; Outlook Stable
OREANDA-NEWS. Fitch Ratings has assigned South Korea-based SR Co., Ltd. (SR) a Long-Term Issuer-Default Rating (IDR) of 'A+' with a Stable Outlook.
KEY RATING DRIVERS
Credit-Linked to KORAIL: SR is credit linked to, and one notch lower than, state-owned Korea Railroad Corp (KORAIL, AA-/Stable). This is reflected in the controlling stakes of KORAIL and SR's strong financial integration and operational ties with KORAIL. SR was set up by the Korean (AA-/Stable) government to improve service and efficiency of the high-speed train industry and provide competition. SR will offer railway services alongside KORAIL's KTX service on the same routes.
Strong Control from KORAIL: The article of incorporation and shareholders' agreement secures KORAIL's controlling ownership of SR and protects SR from being sold to a private party. KORAIL is SR's largest shareholder, with a 41% stake. KORAIL, through the board of directors, is involved in making major business and financial decisions. The article of incorporation requires directors to have railway industry experience and be nominated by KORAIL.
Stable Legal Status: SR's railroad business license clearly states the company cannot be privatised and must remain as a government-owned entity to qualify for the license. Fitch expects SR's legal status to be stable and for KORAIL to remain the controlling shareholder. Furthermore, options from shareholder agreement allow KORAIL to buy stakes from existing shareholders. So Fitch considers the legal status attributes mid-ranged.
Strong Integration with KORAIL: KORAIL fully consolidates SR's financials, including debt. SR shares KORAIL's existing 14 stations, IT system and will lease 22 rolling stocks. Operationally and financially, SR and KORAIL are highly integrated with each other. The service fee is not decided yet and Fitch expects KORAIL and the Ministry of Land, Infrastructure and Transport will ensure SR maintains satisfactory profitability and liquidity.
Strategic Importance Attributes Mid-Ranged: SR's high-speed train service will operate on two routes, directly competing with KORAIL's KTX service. The intention is to bring competition into a monopoly market and improve overall train frequency and efficiency. Fitch considers the duplicate services may undermine SR's strategic importance over time.
Greenfield Company: SR's train service is expected to start operating from the end of 2016, subject to final approval from the Ministry of Land, Infrastructure and Transport. Company projection forecasts high potential demand for SRT with stable cash flows.
Any positive rating action on KORAIL, in conjunction with continued strong support from KORAIL, would result in a similar change in SR's ratings.
A KORAIL downgrade; a dilution in KORAIL's ownership and control of SR or a weakening in links - including the importance of SR's public policy role or lower integration with KORAIL - could trigger a ratings downgrade.