Moody's downgrades ST Engineering's baseline credit assessment; affirms issuer rating

MOODY'S Investors Service has affirmed the Aaa issuer rating of Singapore Technologies Engineering (ST Engineering), but the outlook for the ratings has been cut to negative from stable, it said on Wednesday.

At the same time, Moody's has downgraded ST Engineering's Baseline Credit Assessment (BCA) to baa1 from a3. BCAs are opinions of issuers' standalone intrinsic strength, absent any extraordinary support from an affiliate or a government.

Moody's vice-president and senior analyst Nidhi Dhruv said the BCA downgrade was "to reflect our expectation of a deterioration in its financial profile and liquidity following its announcement of a debt-funded acquisition of TransCore for US$2.68 billion on a cash-free and debt-free basis".

ST Engineering said on Sunday it would spend US$2.68 billion to buy two US transport -solutions firms - historically its biggest deal. The mainboard-listed engineering and aerospace giant will acquire the entire interests in TransCore Partners and TLP Holdings - which provide technical solutions and engineering services to the transportation industry.

Ms Dhruv noted that ST Engineering's largest acquisition thus far would "more than double its reported debt, and signals a shift in the company's acquisition strategy and appetite for leveraging up its balance sheet".

She added: "The sizable transaction also exposes the company to execution risks, although these may be tempered by ST Engineering's plans to keep TransCore's current operations and management unchanged."

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The credit ratings agency noted that gross debt-to-earnings before interest, taxes, depreciation and amortisation (ebitda) will increase to 5.8 times in 2022, assuming the transaction completes at the end of the first quarter of 2022.

This could decline to 4.8 times in 2023, driven by higher growth in certain business segments, and ongoing recovery in the commercial aerospace segment, but Moody's said: "Nonetheless, its leverage will remain significantly higher than the 2.0-3.0 times range it has recorded historically."

The ratings agency noted that ST Engineering also plans to expand its commercial paper programme to US$3.0 billion from its existing size of US$1.5 billion to initially fund the acquisition of TransCore. The company also aims to refinance short-term debt through long dated debt issuances over the next few months.

"However, in the interim, the significant amount of short-term debt will keep ST Engineering's liquidity weak," Moody's said. "The change in outlook to negative reflects the deterioration in financial metrics, weak liquidity especially for such a highly rated company, and substantial refinancing risk given the short-term funding for a large acquisition."

Moody's said the outlook could revert to stable if ST Engineering successfully refinances short-term debt with long-term loans and bonds within a year from completion of the acquisition. The company would also need to grow and deleverage.

Moody's noted that ST Engineering is a government-related issuer, and its Aaa issuer rating - the highest possible - takes into account the BCA of baa1, and expectations of "very strong support" from the Singapore government, through wholly-owned investment company, Temasek Holdings, in times of need. Both the Singapore government and Temasek are Aaa rated with a stable outlook.

"Moody's expectation of support reflects ST Engineering's importance to Singapore as a strategic contractor and supplier of defence equipment, as well as an employer of highly skilled labour," it said.

The ratings agency added that the rating remains supported by the company's strong technological capabilities, which drive its commercial business, while its defence contracts continue to support its underlying operations. It noted that ST Engineering's diversified portfolio partially mitigates demand volatility in any individual segment.

Moody's on Wednesday also affirmed the backed Prime-1 rating on the US$1.5 billion US commercial paper programme issued by ST Engineering North America, a wholly-owned subsidiary of ST Engineering.

ST Engineering shares rose 1 per cent on Wednesday to close at S$3.87.