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Moody's lowers Singtel outlook to 'negative' on price war and Bharti debt

CREDIT rating agency Moody’s has downgraded its outlook on Singtel to “negative”, from “stable”, on glum expectations for the telco’s underlying earnings before interest, tax, depreciation and amortisation (Ebitda) in the next one and a half years.

Besides concern over price competition in Singapore and Australia, the ratings revision on Tuesday also came on the back of the expectation that Singtel will partially or fully subscribe to its portion of a multibillion-dollar rights issue at debt-hit Indian associate Bharti Airtel.

Moody’s had last affirmed Singtel’s outlook as “stable” in 2017, after it knocked the senior unsecured ratings down to “A1” - from “Aa3”, or high-quality and subject to “very low credit risk”, before.

But Bharti Airtel’s latest fundraising exercise, which was approved by the Indian telco’s board on Feb 28, could put the A1 rating at risk if it raises Singtel’s net leverage to around 2.2 times to 2.4 times, which Moody’s said is “not within Moody’s expectations for Singtel’s current A1 rating”.

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This is against a net debt-to-Ebitda ratio of 2.03 times, for the 12 months to Dec 31, 2018, it noted.

Singtel’s level of leverage for that period reflects “a weakening operating and financial profile amid intensifying competition in Singtel's core markets”, according to Moody’s, which also said that “intense price competition in Singapore and Australia is leading to lower average revenue per user and profitability” in those two key markets.

“If Singtel predominantly debt-funds this additional equity injection into Bharti, it would further weaken its metrics and keep net leverage above our tolerance for the rating, absent any capital restructuring initiatives,” said Moody’s senior analyst Nidhi Dhruv.

Moody’s said that Singtel’s outlook could be returned to “stable” if the company’s overall profitability improves and borrowings are reduced.

That means that the adjusted net debt-to-Ebitda ratio must be brought consistently below two times, while the dividend-adjusted Ebitda margin stays within 30 to 35 per cent.

Meanwhile, Moody’s has reaffirmed Singtel’s senior unsecured ratings of A1 - that is, judged to be in the higher end of an upper-medium grade and carrying a low credit risk - along with its A1 rating on all Singtel Group Treasury notes.

The company’s A1 rating is based on both its established and geographically diversified business operations, as well as Moody’s faith in the credit support that state-owned investment firm and majority shareholder Temasek Holdings “is likely to provide in a distress situation”.

Moody’s also said that the reaffirmed A1 rating “continues to reflect the company’s leading market positions and regionally diversified cash-flow stream from its ownership in various Asian mobile associates”, despite the caution over the mid-term operating performance.

“The rating also incorporates the unrealised value of investments that could potentially be monetised to reduce leverage,” Moody’s added.

But, “given the negative outlook, upward pressure on the rating is unlikely”, it said, while also noting that the negative outlook “reflects Singtel's weak credit metrics for the A1 rating level”, as well as uncertainties over potential capital restructuring plans.

And the rating could be lowered again if Singtel's adjusted net debt-to-Ebitda remains elevated or the Ebitda margin drops below 30 per cent “on a sustained basis”, the agency added.

“Downward pressure could also result if the company undertakes further material capital returns in the near term, especially in conjunction with a cash/debt-funded acquisition, or if there is evidence of prospective weakness in the operating results of the company's core operations or in the cash dividends it receives from its overseas associates,” Moody’s has now warned.

Ms Dhruv added: “We expect Singtel will explore alternative funding options - including sale of non-core assets, listing some of its new businesses, and potentially also raising fresh equity to strengthen its capital structure and credit profile.

“However, the timing and execution of these initiatives will be driven by market dynamics, and will be subject to regulatory and shareholder approvals.”

Singtel said in a statement, released on the bourse after the market close, that it "remains financially disciplined and committed to maintaining our investment-grade credit ratings".

The counter closed flat at S$2.99, after the Moody’s decision was announced.