Moody's Disclosures on SingTel Credit Ratings
Debt ratings agency, Moody's has affirmed SingTel's senior unsecured rating as Aa2/stable. The agency said that the rating combines the company's underlying strength derived from its well established and geographically diversified business platform; and the credit support that Moody's believes Temasek -- the Singapore government's investment company -- is likely to provide in a distress situation.
Moody's assessment also considers risks the group may face as it continues to evolve from being a major provider of telecommunications services in Singapore to a pan-Asian telecommunications enterprise with the inherent emerging market risk that entails.
The rating also takes into account SingTel's past shareholder returns which may have tempered upside on the rating. However, it is noted that while SingTel seeks to maintain an ordinary dividend payout of between 55-70% (increased from 45% to 60% in 2010) of underlying earnings, special dividends may also be declared and funded out of exceptional proceeds or surplus cash.
The outlook remains stable reflecting the core strength of SingTel's underlying business. Notwithstanding this, leverage metrics remain weakly positioned for the rating level. Moody's expects there to be an ongoing, albeit, gradual improvement in such measures, failing which there is downward pressure on the rating.
What Could Change the Rating - Up
Moody's considers SingTel's financial profile on a number of different bases including: 1) share of income from affiliates added to EBITDA; 2) on a full pro rata consolidation for all associate investments; and 3) adding only cash dividends from associates to Group EBITDA. In Moody's view the latter more appropriately reflects the volatility inherent in real returns from associates and also de-emphasizes the contribution from Bharti. All rating triggers are based on this approach.
An upgrade is unlikely given SingTel's weak leverage metrics, however, upward pressure on the rating could arise if overall profitability improves, coupled with paring down the debt in absolute terms such that adjusted EBITDA margins are in excess of 40% and adjusted net debt/EBITDA ratio falls below 1.0x. However, given that required leverage metrics necessary for an upgrade are significantly below SingTel's desired level of gearing, upward rating pressure is limited.
What Could Change the Rating - Down
Downward pressure on the underlying rating may occur if it continues to hit the downward rating trigger of 1.5x adjusted net debt/ebitda. Furthermore, if SingTel undertakes further material capital returns in the near term, potentially in conjunction with a cash/debt funded acquisition, and/or there is evidence of prospective weakness in operating results within the company's increasingly important Australian operation or in cash dividends received from overseas associates.
In addition to the factors listed above, SingTel's rating may also be impacted by material changes in the ratings of its support provider, Temasek. Likewise, the rating may be affected should Moody's assess it likely that there will be support changes, or industry developments that materially undermine SingTel's relationship with the government - these would include a reduction in Temasek's shareholding below 50%.