Moody's cuts outlook on Singtel to 'negative'

Price war and debt-ridden Indian associate cast shadow over telco's 18-month forecast

Credit rating agency Moody's has downgraded its outlook on Singtel to "negative" from "stable" on glum expectations for the telco's underlying earnings over the next 18 months.

Besides concern over price competition in Singapore and Australia, yesterday's ratings revision came on the back of the expectation that Singtel will partially or fully subscribe to its portion of a multibillion-dollar rights issue at debt-hit Indian associate Bharti Airtel.

Moody's had affirmed Singtel's outlook as "stable" in 2017, after it knocked the senior unsecured ratings down to A1 - a notch down from Aa3, or high-quality and subject to "very low credit risk".

Bharti Airtel's fundraising exercise, which was approved by the Indian telco's board on Feb 28, could raise Singtel's net leverage to around 2.2 times to 2.4 times.

This figure "is not within Moody's expectations for Singtel's current A1 rating", the credit agency said.

Singtel's level of leverage for that period reflects "a weakening operating and financial profile amid intensifying competition in Singtel's core markets", according to Moody's.

The credit agency also said that "intense price competition in Singapore and Australia is leading to lower average revenue per user and profitability" in those two key markets.

Moody's said Singtel's outlook could return to "stable" if the company's overall profitability improves and borrowings are reduced.

However, "given the negative outlook, upward pressure on the rating is unlikely", it said.

The credit agency warned of further downward pressure if Singtel undertakes more near-term material capital returns, "especially in conjunction with a cash/debt-funded acquisition, or if there is evidence of prospective weakness in the operating results of the company's core operations or in the cash dividends it receives from its overseas associates".

Bharti Airtel advertisements at a phone store in Mumbai, India. Bharti's fundraising exercise may affect Singtel's A1 credit rating.
Bharti Airtel advertisements at a phone store in Mumbai, India. Bharti's fundraising exercise may affect Singtel's A1 credit rating. PHOTO: BLOOMBERG

Moody's senior analyst Nidhi Dhruv added: "We expect Singtel will explore alternative funding options - including sale of non-core assets, listing some of its new businesses and potentially also raising fresh equity to strengthen its capital structure and credit profile.

"However, the timing and execution of these initiatives will be driven by market dynamics, and will be subject to regulatory and shareholder approvals."

Moody's has reaffirmed Singtel's senior unsecured ratings of A1 - recipients of which are judged to be in the higher end of an upper-medium grade and carrying a low credit risk - along with its A1 rating on all Singtel Group Treasury notes.

The A1 rating is based on Singtel's established and geographically diversified business operations, as well as Moody's faith in the credit support that state-owned investment firm and majority shareholder Temasek "is likely to provide in a distress situation".

Moody's also said the reaffirmed A1 rating "continues to reflect the company's leading market positions and regionally diversified cash-flow stream from its ownership in various Asian mobile associates", despite the caution over the mid-term operating performance.

"The rating also incorporates the unrealised value of investments that could potentially be monetised to reduce leverage," Moody's added.

But it noted that the downgraded negative outlook reflects "weak credit metrics" for the company's overall A1 rating level, "with limited potential for near-term improvement in the company's underlying profitability".

Singtel said it "remains financially disciplined and committed to maintaining our investment-grade credit ratings".

Its shares closed flat at $2.99 after the Moody's decision was announced.

A version of this article appeared in the print edition of The Straits Times on March 06, 2019, with the headline 'Moody's cuts outlook on Singtel to 'negative''. Print Edition | Subscribe