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IPhone Drives Hynix Revival as Default Risk Drops: Korea Markets

SK Hynix Inc. Logo at the Company's Headquarters
The SK Hynix Inc. logo is displayed on a glass door at the company's headquarters in Seoul. Photographer: Jean Chung/Bloomberg

Demand for the chips that drive Apple Inc. iPhones and Sony Corp. electronics helped cut bond risk for SK Hynix Inc. by the most of any Korean company, putting it on course for an investment-grade rating.

The cost to protect notes of SK Hynix, which flirted with insolvency throughout much of the last decade, fell 78 basis points this year to 271 yesterday. The company now has a 0.21 percent chance of non-payment in the coming year, from as high as 0.85 percent in September 2011, moving out of the junk bond category, according to Bloomberg’s default-risk model.

Shares of the world’s second-largest maker of dynamic random-access memory chips have jumped 29 percent this year, and its dollar bonds rallied, as JPMorgan predicts DRAM sales will reach a 19-year high in 2014. Industry consolidation has left the chipmaker sharing 95 percent of the market with Samsung Electronics Co. and Micron Technology Inc.

“It’s been a dramatic change,” said Daniel Kim, a Seoul-based analyst at Macquarie Group Ltd. “This once famously fragile company is now strong, so it’s not surprising that yields are falling and the CDS is at record lows. It’s only a matter of time before Hynix will have a debt-free balance sheet.”

The DRAM industry is running up against the limits of how much performance can be extracted from smaller chips using existing materials. While development costs were a catalyst for consolidation, remaining players now have a window to exploit their investments, Kim said.

Rating Outlook

Moody’s Investors Service upgraded the company to a Ba2 rating, two levels below investment grade, in August. Standard & Poor’s rates the Icheon-based chipmaker BB+, it’s highest junk rating, after raising it two notches since SK Telecom Co. bought a 21 percent stake from creditors in early 2012 for about 23,000 won a share. Hynix sharers closed at 47,400 won in Seoul today.

Hynix has a low investment-grade rating, according to Bloomberg’s default-risk model, which takes into account factors such as a company’s indebtedness, profitability, market value and stock volatility.

“We’ve been trying to lower debt ratios and increase cash holdings in case of volatility in global markets,” Park Seong Ae, a Seoul-based spokeswoman for SK Hynix, said in a June 11 interview. “We’ll keep trying to strengthen financial structures.”

The value of the market for DRAM jumped to $35 billion last year and will top $40 billion this year after consolidation led to a “healthy” pricing environment, JPMorgan Chase & Co. analysts led by JJ Park wrote in a June 4 note. SK Hynix is their preferred stock.

Solid Demand

“SK Hynix’s strength from a perspective of credit is that it maintains a strong market position in the consolidated DRAM market supported by its leading-edge processing technology,” said Yoshio Takahashi, a Moody’s Investors Service analyst in Hong Kong. “Its solid financial performance should continue in 2014, given the current supply and demand situation in the DRAM market.”

Of 47 analyst ratings compiled by Bloomberg, 40 recommend buying the stock, with Samsung Securities Co. and Woori Investment & Securities Co. lifting their price targets today.

Macquarie’s Kim has a target of 54,000 won. JPMorgan raised its price target for SK Hynix shares to 56,000 won from 47,000 won, saying that gains in memory prices “fully offset” appreciation by the won that’s made South Korean exports less competitive.

Won Rally

South Korea’s won closed at 1,017.59 to the dollar today, within 0.1 percent of the highest level in almost six years. Its 3.4 percent advance versus the dollar this year is the third-biggest gain among emerging-market currencies. Of 24 developing-economy currencies monitored by Bloomberg, only India’s rupee and Brazil’s real have strengthened more.

SK Hynix, which has 2.45 trillion won ($2.4 billion) of outstanding debt, hasn’t sold bonds since Sept. 2012. The yield on its 2017 U.S. currency notes has declined 42 basis points this year to 1.09 percent yesterday, the least since July 2013.

Ten-year won government bond yields have fallen 20 basis points since March 31 to 3.32 percent today. The yield premium on three-year AA- rated corporate notes fell to a record low of 31 basis points, Bloomberg data show.

The company has reported a profit every quarter beginning in the period ended Sept. 30, 2012. That was just seven months after SK Telecom completed its share purchase, the culmination of the fourth attempt in two years by creditors to exit their stakes as they sought to recoup some of the $4.6 billion they spent bailing out the company.

‘Great Foresight’

At the time, South Korea’s No. 1 mobile-phone operator faced rating cuts of its own in relation to the 3.4 trillion won acquisition, which was more than 50 percent funded by debt.

“SK Telecom was either very lucky or they have great foresight,” said Macquarie’s Kim. “They picked up the company at the bottom of the cycle and now they’re enjoying their good investment.”

SK Hynix is one of the suppliers of mobile DRAM and flash memory used in iPhones and iPad tablets. Apple’s falling out with Samsung is helping to the U.S. company’s share of Hynix sales to about 12 percent to 13 percent this year, Macquarie Group analysts wrote on May 28.

Apple sold 43.7 million iPhones in the quarter ended March 29, topping analysts’ estimates of 37.7 million after making the iPhone available through China’s largest wireless carrier, China Mobile Ltd., earlier this year. The average price of the benchmark DDR3 2-gigabit DRAM chip was $2.187 yesterday, up from $1.23 in January 2013, according to DRAMeXchange.

“SK Hynix has strengthened its credit measures amid support from its parent SK Telecom,” Wi Il-Bog, fixed-income strategy team manager at KTB Asset Management Co. in Seoul, which oversees about 8.2 trillion won of assets, said in a June 9 interview. “It’s not easy to buy its bonds now because there aren’t many outstanding and no one wants to sell.”

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