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Rating Action:

Moody's affirms ST Engineering's Aaa ratings; Outlook stable

03 Jul 2013

Singapore, July 03, 2013 -- Moody's Investors Service has affirmed the Aaa issuer rating of Singapore Technologies Engineering Ltd (STE) and the senior unsecured rating of ST Engineering Financial I Ltd (STEF1), a wholly-owned special purpose funding subsidiary of STE. The (P)Aaa of the medium term note (MTN) programme of STEF1 is also affirmed.

The outlook for all three ratings remains stable.

RATINGS RATIONALE

As a Government Related Issuer (GRI), STE's Aaa rating takes into account its Baseline Credit Assessment (BCA) of a2, as well as the expectation of very strong support from the Republic of Singapore. The expectation of support reflects its importance to Singapore both as a strategic contractor and supplier of defence equipment and as an employer of highly skilled labour.

The government's ability to influence STE's business and impart support, if needed, stems from the special share in the company held by the Minister of Finance and the presence of three directors on the board who represent the Ministry of Defence. STE is a listed company and is 50.4% owned by Temasek Holdings Pte Ltd (Temasek, Aaa stable), a wholly-owned investment company of the Singapore government. Moody's believes that Temasek would be the most likely government body to orchestrate emergency support for STE, in the unlikely event it was required.

STE's BCA has been lowered to a2 from aa3 to reflect its relative position in the global aerospace and defence industry. STE is extremely well-placed to win defence and non-defence contracts from Singapore and has built an impressive track record in the civil aerospace maintenance and modification market. However, as it diversifies and grows its overseas presence it faces more direct competition from the global majors and from the domestic engineering champions in other countries.

"STE has gradually developed a global presence and broadened its customer base through a combination of small acquisitions and extending home grown activities internationally," says Alan Greene

"Nevertheless, as it expands outside Singapore, its small size relative to the major US and European aerospace and defence contractors becomes a greater concern with regards to its ability to compete."

The BCA also reflects the company's strong technological capabilities, which drives its commercial business, while its defence contracts continue to support underlying operations. At the same time, STE's diversified portfolio, focusing on four different segments -- aerospace, electronics, land systems and marine - partially mitigates demand volatility in any individual segment. Notably, the company is a leading player in the global commercial maintenance, repair and overhaul (MRO) segment in the aerospace industry.

Over the past years, STE has achieved a track record of stable operating margins and modest annual revenue growth of some 5%. As of 31 March 2013, its order backlog stood at SGD13 billion, and the backlog typically supports 1.8x to 2.2x the last twelve months' revenue.

STE exhibits strong liquidity and has run a net cash position in recent years which is largely derived from customer pre-payments and advances. It has substantial banking facilities in order to support its performance bonds and bank guarantees as well as its foreign exchange and hedging needs. The company has maintained sound credit metrics but cash flow is relatively weak as a result of its high dividend policy which pays around 90% of reported net income.

STE's financial condition and credit metrics remain strong and go some way towards mitigating its small size.

"While the dividend payout is high, Moody's believes that it could be readily reduced if STE needs more financial flexibility"

The outlook for STE's Aaa rating is stable, reflecting Moody's expectation that (1) the outlook for Temasek is stable; and (2) STE will continue its current business model and prudent financial profile of maintaining excellent liquidity with a net cash position.

Since STE's rating is Aaa, there is no further possibility of an upgrade.

A downgrade in the rating of STE could develop if (1) MOF's special share is converted to an ordinary share, signifying lower support from the Singapore government; (2) there is a change in the relationship between Temasek and STE, which includes, but is not limited to, a reduction in ownership below 50.1%; or (3) a change in STE's role as a key defence and government supplier; or (4) Temasek's rating is downgraded.

STE's rating could also be downgraded if its standalone credit profile deteriorated due to (1) increased volatility and pressure on its profit margins, caused by weak market conditions, intensified competition or moves into new business areas; or (2) reduced liquidity, arising from new acquisitions, substantial capital expenditures, a shrinking order book, or a high capital distribution to the extent that net cash is minimal or the balance sheet shows net debt. Such scenarios, would be accompanied by deteriorating credit metrics and potentially lead to a downgrade of the standalone rating. Credit metrics on a sustained basis that could lead to a downgrade of the standalone rating include i) an EBIT margin falling below 10%; ii) RCF/Debt falling below 18% to 20% and iii) Debt/EBITDA rising above 2.0x.

The principal methodology used in this rating was the Global Aerospace and Defense Industry Methodology published in June 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

STE was formed as a listed holding company in Singapore in December 1997 through the merger of four listed companies: ST Aerospace, ST Electronics, ST Automotive and ST Marine.

Headquartered in Singapore, STE is an integrated defence and engineering group operating in 23 countries and 41 cities. It employs around 14,000 people in Singapore out of global workforce of more than 22,000.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Alan Greene
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Philipp L. Lotter
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: (852) 3758 -1350
SUBSCRIBERS: (65) 6398-8308

Moody's affirms ST Engineering's Aaa ratings; Outlook stable
No Related Data.
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