K-water's USD Bond Final 'AA-' Rating

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K-water's USD Bond Final 'AA-' Rating

K-water Engages in the Construction and Management of Multi-purpose Dams, Estuary Barrages, and Construction and Management of Industrial Water Supply Systems and Water Supply Dams

Fitch Ratings has assigned Korea Water Resources Corporation's (K-water; AA-/Stable) USD300m senior unsecured bond a final rating of 'AA-'.

K-water 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 K-water'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 8 October 2014.

KEY RATING DRIVERS Rating Equalised with Sovereign: The ratings of K-water are equalised with Korea's (AA-/Stable) due to the company's strong strategic and operational ties with the government. The objective of the company is to develop and manage Korea's water resources and to improve the quality of water.

To achieve these objectives, K-water engages primarily in the construction and management of multi-purpose dams and estuary barrages, and construction and management of multi-regional and industrial water supply systems and water supply dams. The company also receives tangible support from the government in the form of capital injection and subsidies.

Four River Restoration Project: K-water's involvement in the Four River Restoration Project, where it has invested nearly KRW8trn (USD7.7bn) at the request of the government, is now almost complete. At the National Policy Coordination Meeting in 2009, which was attended by cabinet ministers, it was decided that the principal of the investment amount would be recovered through development of areas around the rivers, with shortfalls to be compensated by the government once the project is completed.

The government would also continue to extend support to K-water to repay its financing costs until investment costs are recovered. K-water has been receiving government subsidies to cover the financing costs over the past few years, but now that the project is close to completion, there is some uncertainty about the potential support to cover the investment principal, particularly as it is becoming clear that K-water will not be able to recoup all of its investment in the project through the development gains from waterfront development projects alone.

Fitch believes the government will extend support to K-water, given the company's core operations do not generate enough cash to cover the investment amount. However the timing, extent and method of support remain uncertain at this point of time. Stable Core Operations: Fitch expects K-water's core operations to remain stable. The hydro power generating business fluctuates depending on rainfall, but growth in the water supply business is likely to be slow but steady.

The government controls water tariffs and the most recent tariff increase was in January 2013, after water tariffs were frozen since 2005 to control inflation. Weak Standalone Credit Profile: K-water's standalone profile is weak for its rating level as debt levels increased significantly in recent years due to investments in the Four River Project.

The project is nearly complete, but additional investments will likely be needed for ongoing waterfront and site development projects. As a result, Fitch expects K-water's debt levels to continue to increase over the next two to three years, but credit metrics are likely to improve from 2017, when the waterfront projects start to generate profit. Until then we believe meaningful deleveraging is not likely to happen without government support.

RATING SENSITIVITIES The issuer's rating is currently equalised with that of Korea. Negative: Future developments that may, individually or collectively, lead to a negative rating action include: - A 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.

Source: Reuters

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