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Fitch cuts Singtel outlook to 'negative' on Bharti rights issue, weaker growth

MAINBOARD-LISTED Singtel's long-term default outlook has been cut to "negative" by Fitch Ratings, weeks after credit agency Moody's did the same.

The outlook downgrade from "stable" came on the back of both Singtel's planned rights subscription in Indian associate Bharti Airtel and prospects of weaker earnings growth in tough markets, Fitch said on Thursday - the same reasons that had been given by Moody's Investors Service on March 5.

But both Fitch and Moody's kept their senior unsecured ratings for the telco, with Fitch holding to an "A+" rating. Moody's has an "A1" rating, albeit with a warning of "weak credit metrics", while Standard & Poor's (S&P) recently reiterated an "A+" rating and stable outlook on Singtel.

Fitch, like the two other credit agencies, also flagged the possible risk of Singtel pushing its debt levels past the trigger for a ratings downgrade, even though S&P had argued that Singtel's 37.5 billion rupees (S$726.2 million) investment in new Bharti Airtel shares - which is to be funded with a mix of internal funds and debt - fell within its analysts' expectations.

Fitch noted that Singtel's funds from operations-adjusted net leverage are likely to increase, in its financial years to end-March 2019 and 2020, past the downgrade threshold of two times.

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"We expect net leverage to increase to 2.3 times to 2.5 times over the next three years, excluding potential asset disposals and a meaningful improvement in the group's organic deleveraging capacity," it said, calling the debt ratio inconsistent with a standalone credit profile (SCP) of "A".

Fitch observed that "Singtel's ratings include a single-notch uplift from its standalone credit profile ... due to links with the sovereign", but warned that "should linkages with the sovereign weaken, Singtel will be downgraded to its SCP". Singtel is majority-owned by state investment firm Temasek Holdings, which has a 52.3 per cent interest in the company.

"The company's non-core assets, including its minority stakes in Singapore Post and NetLink Trust, could improve leverage if monetised," Fitch added. "However, given the uncertainties associated with such transactions, we will only factor in the benefits in our analysis when we have a high level of confidence on the timing and cash value of a deal."

But Fitch noted that Singtel still "compares favourably with a global peer group of 'A' category telecom operators, which includes large, diversified companies with strong market positions and net leverage above three times", such as American telcos AT&T and Verizon Communications.

Singtel's outlook could be bumped back up to stable if the leverage situation improved, "or if Singtel were to demonstrate a commitment to improve its financial profile, as indicated by a more measured shareholder return policy or credible deleveraging plan", Fitch added.

Singtel paid out 77 per cent of underlying profit for the half-year to Sept 30, 2018 and has projected ordinary dividends of 17.5 Singapore cents a share for the next two financial years before resuming a payout ratio of between 60 per cent and 75 per cent of underlying net profit.

In line with Fitch's parent and subsidiary rating linkage criteria, the agency has also knocked its outlook on Optus, Singtel's wholly-owned Australian subsidiary, down from stable to negative, while affirming a senior unsecured credit rating of "A".

Leaving room for some hits to the credit profile, Singtel had said in a statement after the Moody's outlook revision that it was "committed to maintaining our investment-grade credit ratings". While different agencies may use different terms, "investment-grade" refers to Moody's long-term ratings of at least "Baa3", or Fitch and S&P ratings of at least "BBB-".

Singtel closed flat at S$2.97 on Friday.

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