S&P: Korea Expressway Corp. 'AA' Ratings Affirmed; Outlook Stable; SACP Revised To 'bbb' From 'bbb-'
Our revision of the SACP for KEC primarily reflects our expectation that the company will improve its operating and financial performance over the next one to two years mainly due to a recent tariff hike and steady traffic volume growth.
The Korean government allowed KEC to raise its average toll rates by 4.7% in December 2015 after a four-year toll rate freeze. We believe this toll hike, which was somewhat higher than our previous expectation, has substantially reflected the country's inflation rate over the past several years. We expect the government is likely to control toll road rates somewhat less tightly than before, given loosening inflation pressure in Korea. Although we still see limited transparency on the timing of tariff adjustments, we expect to see an increasing correlation between the rate adjustment level and the country's inflation rate.
We expect KEC's toll road traffic volume to grow steadily over the next 12 months. This is mainly attributable to additional demand stemming from lower oil and gas prices as well as marginal incremental growth from the opening of new toll roads that the company is currently developing. Also, we believe KEC will maintain stable and strong operating profitability, with an EBITDA margin of over 60% over the next two to three years, owing to its dominant position in the domestic toll-road sector and the resilience of toll revenues to economic downturns.
We expect measures of KEC's credit quality, including ratios of debt to EBITDA, funds from operations (FFO) to debt, and FFO interest coverage, to improve modestly over the next 24 months. We estimate the company's debt to grow to some extent over the next two to three years mainly because of ongoing large capital investments in construction of new roads. However, we expect improving operating performance to outpace growth in debt, resulting in KEC's FFO to debt ratio improving to 7%-8% in 2016 and 2017, compared with 6% in 2015. Also, we believe the company will benefit from lower domestic interest rates and its strong access to capital markets, which enables it to maintain relatively good interest coverage ratios. Our forecasts are supported by the company's performance over the first half of 2016, with revenue and EBITDA growing by about 13% against the corresponding prior period in 2015, which provides good visibility for performance in 2016.
Our assessment of an almost certain likelihood that the government of the Republic of Korea (AA/Stable/A-1+) will provide KEC with timely and sufficient extraordinary support in the event of financial distress remains unchanged. This reflects KEC's critical role to the government and the national economy as the sole government-owned national expressway builder and operator and its integral link with the government, resulting from the government's direct and indirect ownership of 99.98% in KEC.
The stable outlook on KEC reflects the outlook on the sovereign ratings on Korea because we equalize the ratings on both. The equalization of the ratings reflects our expectation that there is an almost certain likelihood of the government providing KEC with extraordinary support in the event it were to suffer financial distress.
We would lower our ratings on KEC if we were to downgrade Korea. Also, a weakening of KEC's role as a policy arm of, or in its link to, the government could constrain our ratings on the company.
We would raise the ratings on KEC if we were to raise the sovereign rating on Korea.