Fitch Affirms Singtel's & Optus' Debt Ratings

Debt ratings agency, Fitch has affirmed Singapore's SingTel and its Australian subsidiary, Optus' Long-term foreign currency Issuer Default Ratings (IDR) at 'A'. The Outlook remains Stable. At the same time, Fitch has affirmed SingTel's and Optus' outstanding senior unsecured bonds at 'A'.

Fitch says that SingTel's rating reflects its dominant position in the Singapore telecommunications sector, the entrenched position of its wholly-owned subsidiary Optus in the Australian telecommunications sector, as well as its strong and diversified portfolio of regional investments. While the domestic franchise remains an important contributor to group earnings and cash flow, SingTel's overseas operations are the main driver of its consolidated profile, accounting for 73% of enlarged revenue and 72% of proportionate EBITDA in the nine months to end-December 2008.

"Although Singapore and Australia delivered reasonably strong operational results during 9M09, the businesses are beginning to feel the impact of the ongoing slowdown, with some customer segments cutting back on access lines and usage," notes Priya Gupta, Director in Fitch's Asia-Pacific Telecommunications, Media and Technology (TMT) team. "At the same time, group financial results have been negatively impacted by the depreciation of the Australian Dollar and other regional currencies against the Singapore Dollar, resulting in revenue growth falling to 2.5% for 9M09 from 11% in FY08 (year end March) and associate contributions declining 20% over the prior period, " says Ms. Gupta. The decline in associate contributions was also on account of operating challenges in certain markets, particularly aggressive price wars in Indonesia and weaker cellular usage in the Philippines.

As the group typically returns excess cash to shareholders, leverage metrics have remained relatively stable in recent years, and in the absence of any major debt-funded M&A, Fitch expects SingTel to sustain its moderately leveraged profile through the next financial year ending March 2010. SingTel's FFO adjusted net leverage (defined as lease-adjusted net debt divided by funds from operations plus Net Interest Expense plus Rental Expenses) improved slightly to 1.7x at December 2008 from 1.8x at March 2008 while FFO by Gross Interest Expense rose to 14.7x from 12.9x over the same period.

The rating on Optus reflects its solid market position in Australia and its strong financial profile characterised by moderate leverage and strong debt service metrics. The rating also reflects the agency's assessment of the strong linkage between the SingTel and Optus, based on its Parent and Subsidiary Rating Linkage methodology. As its largest subsidiary and contributor, accounting for over 50% of SingTel EBITDA, Optus is a core subsidiary of SingTel.

"Optus' financial profile has improved over the last five years through strong free cash flow generation. However, during FY08 Optus up-streamed some AUD1.3bn to its parent. Fitch expects Optus to continue to distribute excess cash flow to its parent and, accordingly its financial profile appears to have stabilised," comments Vicky Melbourne, Senior Director in Fitch's Asia-Pacific TMT team. "Optus' challenge in the coming years will be to continue to extract growth from its mobile division, which has historically been the growth engine of the business, in view of Telstra's strong market position and also likely greater competition from a potentially stronger third player in light of the recent merger announcement by Vodafone Australia and Hutchison Telecommunications Australia. Positively, the decision by the government to not proceed with any of the national broadband network bids, removes near-term uncertainties surrounding the financial impact associated with the project, had Optus been the successful bidder."

The Stable Outlook reflects the expectation that SingTel will maintain its robust market positions in Singapore and Australia, notwithstanding competitive pressures, and that its financial performance will remain reasonably resilient through the ongoing downturn in view of its moderately leveraged balance sheet and strong pre-dividend FCF position. However, SingTel's rating could be downgraded in the event of material debt-funded acquisitions/investments, capital management initiatives or a sharp deterioration in the operating environment which leads FFO adjusted net leverage to exceed 2.0x.

SingTel is Singapore's incumbent operator with fully diversified and integrated operations. Apart from Optus which is wholly-owned, SingTel holds non-controlling stakes in several regional operators including Indonesia's Telkomsel (35%), Thailand's AIS (21.35%), Globe (47.34%), Bharti Airtel (30.44%), Pacific Bangladesh Telecom Ltd (45%) and Warid Telecom (30%). The group remains keen on further investments in higher-growth emerging markets in Asia and the Middle East, and Fitch notes that opportunities may arise over the near-term in light of asset values trending downwards. However, the agency highlights that there is limited flexibility at the current rating for material acquisitions.

Posted to the site on 8th April 2009