Australia's Optus Gets Debt Ratings Downgrade
Published on: 24th Feb 2014
By: Ian Mansfield
Moody's Investors Services has downgraded the long terms debt ratings at Australia's Optus although the long term outlook was revised to stable from negative.
Optus Finance is a wholly owned and guaranteed subsidiary of SingTel Optus.
"The downgrade reflects the weakening in Optus' credit profile at the previous rating level, with trend in elevated leverage, intensely competitive operating environment, and business profile that is comparatively weak compared to major telcos at that rating level" says Ian Lewis a Moody's Senior Vice President.
"We expect Optus' financial leverage to increase as it moves to fund its purchase of new spectrum, at least partially through additional debt. The new A1 rating incorporates a level of tolerance for the uncertainty that exists over the company's capital structure and the level of cash that will be repatriated to the 100% parent, Singapore Telecommunications Limited (SingTel, Aa3/stable)", says Lewis. "The downgrade captures our expectation that Optus will continue to upstream funds to SingTel, further constraining its financial profile" says Lewis who is also the Lead Analyst for the company.
"We expect that debt funded investments and shareholder friendly activities will raise Optus' financial leverage (measured using Debt/EBITDA) to about 1.5x or slightly above, which leaves no headroom within its previous rating. The new rating provides Optus with a degree of headroom to manage its capital and the likely impact of heightened market competition", says Lewis.
"We believe that the operating profile of the company is likely to weaken as vigorous competition in the mobile market continues to intensify. Telstra Corporation Limited (A2 stable) -- Optus' main rival in Australia -- has captured the lion's share of the mobile market and we expect that this dynamic will exert downward pressure on Optus' margins and cash flow over time" adds Lewis.
Optus' senior unsecured long term rating of A1 includes a two-notch uplift from its underlying standalone credit profile. Optus' A1 rating benefits from the presence and support of parent SingTel through its 100% ownership and close operational, financial and strategic integration with SingTel. Optus offers SingTel control of the leading alternative integrated carrier in one of Asia Pacific's largest markets, providing a level of unique geographic diversification for the group. For the nine months ended December 2013, Optus contributed around 50% of SingTel's reported EBITDA.
What Could Change the Rating - Up
Positive pressure on the rating could evolve over time if cashflow repatriation to the parent and capex moderates to levels that are consistent with long term sustainable leverage of below 1.4x Debt/EBITDA. Articulation of a clear capital management framework, including dividend distribution policy, consistent with maintenance of such a leverage level would assist in this regard.
What Could Change the Rating - Down
Further excessive up-streaming of cash flows to Optus' parent or increased borrowing to fund new acquisitions or capex could lead to further pressure on the rating. In addition, heightened levels of competition in Optus' operating environment could lead to reduced revenues and/or compressed margins. Moody's would consider Debt/EBITDA rising above 1.75x as indicative of such negative rating pressure. EBITDA margins of less than 28% could also pressure the rating. In addition, the rating could be subject to negative rating pressure if the implied support from SingTel was reduced or the parent's credit rating was downgraded.