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Hong Kong Telecommunications (HKT) Limited -- Moody's assigns Baa2 to proposed USD notes guaranteed by HKT

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Rating Action: Moody's assigns Baa2 to proposed USD notes guaranteed by HKTGlobal Credit Research - 10 Jan 2022Hong Kong, January 10, 2022 -- Moody's Investors Service has assigned a Baa2 rating to the proposed USD senior unsecured notes to be issued by HKT Capital No. 6 Limited, a direct and wholly owned subsidiary of Hong Kong Telecommunications (HKT) Limited (HKT, Baa2 stable).The proposed notes will be irrevocably and unconditionally, jointly and severally guaranteed by HKT and its parent, HKT Group Holdings Limited.The rating outlook is stable.HKT will use the bond proceeds for general corporate purposes, including refinancing existing debt.RATINGS RATIONALEHKT is an indirect and wholly owned subsidiary of HKT Group, which is in turn wholly owned by HKT Limited. Because HKT is HKT Limited's principal operating entity, Moody's considers HKT Limited's operating and financial metrics when assessing HKT's credit profile."HKT's Baa2 rating reflects its strong business profile, steady market shares, stable earnings from its core operations, and excellent liquidity," says Gloria Tsuen, a Moody's Vice President and Senior Credit Officer.HKT is the best-in-class quad-play telecommunications services provider in Hong Kong SAR, China (Aa3 stable), with leading market positions in all major services it provides, including fixed line, broadband, mobile and pay television.These strengths mitigate the company's high financial leverage (including deferred spectrum obligations), high dividend payouts, and its ultimate parent PCCW Limited's weaker credit quality.The proposed bond issuance will not have a material impact on HKT's leverage as the proceeds will be used primarily for refinancing.Moody's forecasts HKT's adjusted debt/EBITDA will increase to about 4.4x in 2021 from 4.0x in 2020 pro forma for the acquisition of Now TV. The increase will be driven by the addition to adjusted debt of HKD3.3 billion in deferred spectrum obligations from the renewal of the company's 900 megahertz (MHz) and 1800MHz spectra in 2021.However, Moody's expects the ratio to gradually improve towards 4.0x over 2022-23, mainly underpinned by a moderate growth in earnings and the company's deleveraging measures. This ratio level is still high for the Baa2 rating level, but mitigated by HKT's highly stable business profile.Excluding the deferred obligations, HKT's adjusted debt/EBITDA would be 3.9x-4.0x over the next 12-18 months.HKT's liquidity is excellent. It had $276 million in cash and short-term deposits and $1,014 million in undrawn facilities as of the end of June 2021. As of the same date, its only debt maturity over the next 12-18 months comprises $103 million of bank loans, although there are more sizable maturities in 2023.In terms of environmental, social and governance (ESG) factors, the company has low exposure to environmental risks and moderately negative exposure to social risks, similar to that of its global peers. However, its exposure to governance risks is highly negative, reflecting the majority ownership and control by its ultimate parent PCCW, as well as a lack of board independence.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe stable outlook reflects Moody's expectation that HKT Limited's adjusted debt/EBITDA will gradually improve over 2022-23, driven by earnings growth and deleveraging measures.A rating upgrade would be possible if Hong Kong Telecommunications retains its solid market positions in all major segments and improves its financial profile significantly.Specific metrics that Moody's will consider for an upgrade include adjusted debt/EBITDA below 3.0x on a sustained basis, an adjusted EBITDA margin above 40%, and retained cash flow/debt improving to 20%.Downward rating pressure could materialize if HKT loses its leading position in the Hong Kong market, it pursues an aggressive distribution or investment strategy that results in high debt levels, and PCCW's credit quality weakens significantly.Specific metrics that Moody's will consider for a downgrade include adjusted debt/EBITDA above 4.0x, or an adjusted EBITDA margin below 32%.The principal methodology used in this rating was Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Hong Kong Telecommunications (HKT) Limited (HKT), the ex-incumbent integrated telecommunications provider in Hong Kong, is wholly owned by HKT Group Holdings Limited. HKT Group is wholly owned by HKT Limited, which is 51.94%-owned by PCCW Limited.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. Unless noted in the Regulatory Disclosures as a Non-Participating Entity, the rated entity is participating and the rated entity or its agent(s) generally provides Moody's with information for the purposes of its ratings process. Please refer to www.moodys.com for the Regulatory Disclosures for each credit rating action under the ratings tab on the issuer/entity page and for details of Moody's Policy for Designating Non-Participating Rated Entities.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.The first name below is the lead rating analyst for this Credit Rating and the last name below is the person primarily responsible for approving this Credit Rating. Gloria Tsuen, CFA VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Chris Park Associate Managing Director Corporate Finance Group JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Hong Kong Ltd. 24/F One Pacific Place 88 Queensway Hong Kong China (Hong Kong S.A.R.) JOURNALISTS: 852 3758 1350 Client Service: 852 3551 3077 © 2022 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. 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