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Singtel gets closer to S&P rating downgrade, agency warns

SINGTEL is skirting closer to a downgrade trigger on its long-term credit rating of "A+", Standard and Poor's (S&P) said in a note on Tuesday - the second such warning from a ratings agency in a week.

Mainboard-listed Singtel's planned investment in the rights issue at debt-hit associate Bharti Airtel, which is expected to add to net debt, "will not materially affect base-case projections", according to S&P Global Ratings, which also reiterated the "A+" rating and its outlook of "stable" for Singtel.

But the S&P note also warned that Singtel's operating performance has been "slightly weaker than we expected", thinning the financial headroom needed for the telco to maintain its rating.

S&P's concerns came on the back of the performance of Singtel's operations in Singapore and Australia - and not the Bharti Airtel rights issue, which will see Singtel fork out 37.5 billion rupees (S$726.2 million) for 170 million new shares in the Indian telco, where it is the biggest shareholder. The Bharti Airtel investment, said the S&P analysts, came in within their expectations.

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The rights exercise had earlier been flagged by ratings agency Moody's Investors Service, which fretted - before Singtel confirmed the size of its rights subscription -  that debt related to the fund-raising could push the net leverage beyond the threshold for an "A1" rating.

Moody's lowered its outlook on Singtel from stable to "negative" on March 5, while also noting the company's "weak credit metrics for the 'A1' rating level, with limited potential for near-term improvement in the company's underlying profitability".

S&P has now projected Singtel's funds from operations-to-debt ratio to be between 45 per cent and 46 per cent for the year to March 31, 2020 - close to the downgrade trigger of 45 per cent. The agency previously estimated a ratio of between 47 per cent and 49 per cent in a research note in August 2018.

Singtel most recently reported a 10.6 per cent drop in third-quarter operating earnings before interest, tax, depreciation and amortisation (Ebitda), to S$1.19 billion, for the three months to Dec 31, 2018. This was not counting its share of associates' pre-tax profits.

But the S&P analysts wrote that "Singtel's cash flows have been largely unaffected by Bharti Airtel's operating performance ... because the Indian operator does not distribute material dividends".

"Singtel's overall performance in recent years has remained stable, benefiting from Singtel's geographical diversification," they added in their latest note. "Singtel's operating entities are among the top players in their respective markets in Asia-Pacific.

Singtel had previously said, in a statement after the Moody's outlook revision, that it remained "committed to maintaining our investment-grade credit ratings". Investment grade refers to Moody's long-term ratings of at least "Baa3", or S&P ratings of at least "BBB-".

Singtel closed up by S$0.02, or 0.68 per cent, at S$2.95, before the S&P statement was released.