Fitch Affirms Korea Land and Housing at 'AA-'; Outlook Stable
KLHC's ratings and the Stable Outlook reflect the company's strong ties with the Korean government and its status as the state's sole policy execution arm for national housing and land development.
KEY RATING DRIVERS
Ratings Equalised with Sovereign: KLHC's ratings are equalised with the ratings of South Korea (AA-/Stable) due to its status as a not-for-profit quasi-government institution and strategic importance to the state. Fitch believes there is a strong likelihood that the state would extend extraordinary support to the company, if needed.
Critical State Policy Arm: KLHC implements the state's land and housing policies to ensure a stable supply of residential housing and efficient use of national land. KLHC is also a major developer of new cities, industrial and logistics complexes and high-tech zones. The company's strategic importance has been further strengthened as the Korean authority wants KLHC to focus more on providing housing welfare and city renewal projects.
Solid State Support: KLHC is entitled to receive state compensation for losses incurred in connection with certain eligible public projects if the company fails to maintain an overall level of profitability for a given year, as outlined in Article 11 of the Korea Land and Housing Corporation Act. The state also provides KLHC with regular capital injections (KRW1.1trn in 2015), low-interest long-term subordinated debt (34.8% of total debt in June 2016) and subsidies for public projects. Article 9 and 10 state that the Korean government may provide a guarantee for the repayment of interest and principle of overseas and onshore debt.
Strong Control and Supervision: KLHC is wholly owned by the state (directly and indirectly) and, as such, is closely supervised by the Korean government. It reports to - and is supervised by - the Ministry of Strategy and Finance and the Ministry of Land, Infrastructure and Transportation. The state appoints the company's president and external auditor.
Weak Financials; Adequate Liquidity: The company's not-for-profit quasi-government institution status provides it with ready access to local and international funding markets. Weak financial metrics and cash-generating ability are mitigated by strong financial and policy state support. KLHC maintains adequate liquidity.
Debt Reduction Efforts: KLHC has made a significant effort to reduce its debt, in accordance with the Korean government's initiative to reduce public-sector entity debt. Its debt/equity ratio declined to 253% in 2015, from 340% in 2013, and EBITDA interest coverage was 1.3x, the first time this ratio was above 1.0x. Further deleveraging is not probably, due to the company's large capex requirements.
Positive rating action on the sovereign, in conjunction with continued strong state support, would result in a similar change in KLHC's rating.
A sovereign downgrade, a dilution in state ownership and control or a weakening in KLHC's links with the government - including the importance of its public policy role and budgeting relationship - could trigger a rating downgrade.