Rating Action: Moody's assigns Baa2 to SK Hynix's proposed senior unsecured notes; outlook negative
Global Credit Research - 06 Jan 2021
Hong Kong, January 06, 2021 -- Moody's Investors Service has assigned a Baa2 rating to the proposed senior unsecured USD notes to be issued by SK Hynix Inc. (Baa2 negative).
The rating outlook for SK Hynix is negative.
SK Hynix will use the proceeds from the notes for general corporate purposes, including the repayment of outstanding borrowings and capital expenditures, and -- in the case of the green bond tranche -- for eligible projects that meet SK Hynix's green financing framework.
"SK Hynix's Baa2 ratings reflect its strong position as the world's second-largest memory chip producer and the likelihood of support from its largest shareholder, SK Telecom Co., Ltd., in case of need, which results in a one-notch rating uplift from its standalone credit quality," says Sean Hwang, a Moody's Assistant Vice President and Analyst.
"At the same time, the ratings also take into consideration SK Hynix's high reliance on dynamic random-access memory (DRAM) chips for profit generation, and the high cyclicality and sizeable investment requirements inherent to the memory chip business," adds Hwang.
Moody's expects the planned $9 billion acquisition of Intel Corporation's (A1 stable) NAND memory and storage business will strengthen SK Hynix's competitive position in the global memory chip industry, but at the expense of an increase in debt leverage over the next 12-18 months.
Moody's expects SK Hynix's adjusted debt/book capitalization to increase to 23%-25% in 2021 from around 21% at the end of 2020, while adjusted debt/EBITDA will remain broadly stable at 0.8x-1.0x on a proforma basis. These ratios are at the weak end of SK Hynix's current standalone credit quality.
This proforma projection incorporates Moody's assumption that SK Hynix will need around KRW4 trillion in new debt during 2021 to partly fund the $7 billion first-phase consideration likely due in the late part of the year.
At the same time, Moody's expects conditions in the global memory chip industry to continue to improve in 2021, supported by growing demand from smartphone and data server customers. As a result, Moody's expects SK Hynix's adjusted EBITDA will reach KRW19 trillion in 2021, on a pro forma basis, including the full-year contribution of Intel's NAND business.
That said, uncertainties remain over this expected industry recovery and the size of SK Hynix's free cash flow. Weaker-than-expected cash flow and higher acquisition debt would lead to a steeper deterioration in SK Hynix's debt leverage than Moody's currently expects. These uncertainties drive the company's current negative outlook.
In terms of environmental, social and governance (ESG) considerations, the rating considers SK Hynix's increasingly aggressive investments and shareholder distributions. However, the associated risks are mitigated by Moody's expectation that the company will focus on increasing its free cash flow generation over the next 12-18 months.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The outlook could return to stable if SK Hynix improves its earnings and controls its investments, thereby curbing a significant further debt increase. Specifically, Moody's would consider a change in outlook to stable if adjusted debt/EBITDA falls below 1.0x on a sustained basis and debt/capitalization remains below 23%-25%.
Moody's could downgrade SK Hynix's ratings if its financial profile weakens further due to persistently weak profitability, aggressive shareholder distributions, or a heavy use of debt for the upcoming acquisition of Intel's NAND business, such that adjusted debt/EBITDA remains above 1.0x or debt/capitalization stays above 23%-25%.
The ratings could also be downgraded if there is a significant erosion of SK Hynix's market positions or delays in technological migrations, or an adverse change in the relationship between SK Hynix and SK Telecom.
The principal methodology used in these ratings was Semiconductor Methodology published in December 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1248106. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
SK Hynix Inc., a Korea-based company, is engaged in the design, manufacture, and sale of memory chips, mainly DRAM and NAND flash memory. It is 20.1% owned by SK Telecom Co., Ltd.
For 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.
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Sean Hwang Asst Vice President - Analyst 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
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