S&P downgrades Singtel Optus' stand-alone credit rating

AMID the challenging operating environment, credit agency Standard & Poor (S&P) on Tuesday downgraded Singtel Optus' stand-alone credit profile (SACP) to reflect the firm's weaker performance in the financial year ended March 31, 2020 (FY2020). 

The SACP of the Australia-based telecommunications services provider was revised from "BBB+" to "BBB". But overall, S&P Global Ratings had affirmed its "A-" issuer credit and issue-level ratings on Optus, on the grounds that the agency considers Optus as a core subsidiary of mainboard-listed Singtel, and hence aligned its rating with Singtel's SACP of "A-". 

S&P said: "The stable outlook on Optus mirrors that of its parent company Singtel." Optus contributes about half of Singtel's adjusted revenue and 40 per cent of its adjusted Ebitda (earnings before interest, taxes, depreciation, and amortisation). 

To be clear, the ratings on Optus do not factor in any support from the Singapore government, as S&P does not believe the potential support for Singtel would flow through to Optus, given its status as an offshore subsidiary. 

S&P said Optus' shareholder dividends and significant network investment requirements have elevated its financial leverage over the past four years.

The company's adjusted debt to Ebitda increased to about 2.5 times in FY2020, compared with 1.9 times in FY2019.

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The agency further noted that Optus' operating and financial performance were "significantly weaker" in FY2020. Unadjusted revenue and Ebitda declined 6.4 per cent and 18.7 per cent respectively, excluding the impact of one-off National Broadband Network (NBN) migration revenues. 

"This deterioration reflects a challenging operating environment due to price competition, as well as cautious business and consumer sentiment exacerbated by the Australian summer bushfires and the initial fallout of Covid-19," said S&P. 

To add, the negative effects of lower NBN resale margins is having a greater effect on earnings as subscriber migration reaches critical mass. In FY2020, Optus' consumer business Ebitda declined by 15.4 per cent; Ebitda for the enterprise business slumped 55.7 per cent from the year before, excluding the impact of the one-off NBN migration revenues. 

S&P said it is aware that the FY2020 results came before the full impact of the fallout from Covid-19. 

While the extent and duration of the pandemic remain uncertain, the agency's current forecast assumes that Optus' adjusted Ebitda and margins will remain under pressure over the next 12 months. Persistent price competition and margin dilution caused by the NBN are also likely to continue to weigh on Optus' earnings profile, it said.

S&P added that its assessment of Optus' commitment to grow earnings while limiting pressure on its balance sheet will be a key rating consideration over the next two years. It expects the firm to maintain its No. 2 market position in Australia. 

Optus currently holds about 27 per cent of retail market share by revenue for mobile phone services in Australia, and 15.5 per cent of wholesale market share for NBN services.

S&P noted that the ratings on Optus may face downward pressure if its parent company Singtel's SACP gets downgraded, or if Singtel reduces its shareholding in Optus, or shows evidence that Optus' importance in the group is "diminishing". 

Another factor would be a material increase in Optus' business or financial risks. This could include a scenario where Optus maintains a substantially more-aggressive financial risk profile than the broader Singtel group, such that its debt-to-Ebitda exceeds three times, said S&P.