RPT-Fitch Affirms SingTel & SingTel Optus at 'A+'/'A'; Outlook Stable

Tue Jun 24, 2014 5:06am EDT

(Repeat for additional subscribers)

June 24 (Reuters) - (The following statement was released by the rating agency)

Fitch Ratings has affirmed Singapore Telecommunications Limited's (SingTel) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs), as well as its senior unsecured rating, at 'A+'. The agency has also affirmed the company's wholly owned subsidiary SingTel Optus Pty Limited's (Optus) Long-Term Foreign-Currency IDR and senior unsecured rating at 'A'. The Outlook on both IDRs is Stable.

Key Rating Drivers

Low Rating Headroom: We expect SingTel's FFO-adjusted net leverage for the financial year ended March 2015 (FY15) to be about 1.9x-2.0x (FY14: 1.9x) - around the threshold level of 2.0x above which Fitch may consider negative rating action. Fitch forecasts that SingTel's FY15 EBITDA (SGD5bn) and associate dividends (SGD1.1bn-1.2bn) will fall short of its financial commitments including interest and taxes (SGD900m), capex (SGD3.2bn), dividends (SGD2.6bn) and acquisitions (SGD450m).

Acquisitions to Weaken Leverage: SingTel's SGD2bn acquisition budget to be invested till FY16 on its Digital Life segment will weaken its credit profile in the short term. To date, SingTel has invested about SGD460m to acquire mobile advertising and marketing analytics companies to foray into new technology businesses. This strategy aims to generate long-term revenue growth, to offset largely stagnant operating cash flows in the core Singaporean and Australian operations. Fitch expects the Digital Life segment to continue to report EBITDA losses during FY15-16 (FY14:SGD170m).

Little FFO growth: We forecast FY15 FFO to be flat at SGD5.2bn-5.3bn (FY14: SGD5.3bn) as tiered data pricing in Singapore and declining handset subsidies at Optus would offset general stagnancy in both the markets and EBITDA losses in the Digital Life segment. Fitch expects Optus's FY15 EBITDA to be largely flat as higher marketing expenses would offset general cost savings as the company focuses on driving subscriber growth.

Fitch expects associates dividends to remain stable at SGD1.1bn-1.2bn (FY14: SGD1.2bn) as its Indonesian and Thai associates would continue to generate healthy cash on stable competitive dynamics and higher data revenues.

Higher FY15 Capex: We think FY15 capex will increase to SGD3.2bn (FY14: 2.4bn) before reducing to SGD2bn during FY16-17. SingTel will spend SGD2.3bn to strengthen its 4G coverage in Australia and Singapore, invest in a sea cable (Sea-Me-We 5) and will pay SGD900m for spectrum payments mainly including Optus's 4G spectrum. The company will expand its Australian 4G coverage which had on-street metro population coverage of 75% as at 31st March 2014.

Parent support: SingTel's 'A+' ratings continue to factor in a one-notch support above its standalone ratings to reflect the government of Singapore's (AAA/Stable) majority ownership (52% at end-May 2014) through Temasek Holdings Pte Ltd (Temasek). SingTel is Temasek's largest investment, accounting for about 14% of its total investment portfolio of SGD215bn at end-March 2013.

Market Position Intact: SingTel's standalone credit profile of 'A' factors in its diversified cash flow stream through its solid market position in Singapore, second market position in Australia through Optus and a leading market position in India, Indonesia, Philippines and Thailand through associates

Optus-SingTel Links strong: The strength of Optus's links with SingTel leads to an equalisation of its rating with SingTel's standalone credit profile of 'A'. SingTel owns 100% of Optus, and has a majority representation on the company's board. Optus contributed 46% of SingTel's FY14 FFO. Fitch expects Optus's FY15 revenue to decline by low single digit (FY14: -5%) and absolute EBITDA to remain flat.

Rating Sensitivities - SingTel

Positive: Although there is limited upside potential to SingTel's rating in the short to medium term, future developments that may, individually or collectively, lead to positive rating action include:

- FFO-adjusted net leverage falling below 1.0x with positive post dividend distribution FCF on a sustained basis

- Tangible evidence of support from Temasek including an equity injection or a legal guarantee on SingTel's debt

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- FFO-adjusted net leverage rising above 2.0x on a sustained basis

- FFO fixed charge coverage falling below 7.0x on a sustained basis (FY14: 7.7x)

- weakening of ties between Temasek and SingTel, indicating a change in implied support

Rating Sensitivities - Optus

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

-An upgrade of SingTel's standalone ratings or a strengthening of the linkage between SingTel and Optus (e.g. parental legal guarantees)

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- A downgrade of SingTel's standalone ratings or a weakening of the linkage between SingTel and Optus.