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Rating Action:

Moody's assigns Aaa to STE's MTN program; outlook stable

07 Jul 2009

Singapore, July 07, 2009 -- Moody's Investors Service has today assigned an Aaa senior unsecured rating to the USD1.2 billion multi-currency medium-term note ("MTN") program of ST Engineering Financial I Ltd, a wholly-owned special purpose funding subsidiary of Singapore Technologies Engineering Ltd ("STE").

The MTN program is unconditionally and irrevocably guaranteed by STE, and to which its proceeds will be on-lent. The net proceeds will be used for funding new capital expenditures, acquisitions, general corporate purposes and/or refinancing existing borrowings.

At the same time, Moody's has affirmed STE's Aaa issuer rating. The outlook for all ratings is stable.

STE's Aaa rating combines the: (1) company's underlying credit strength -- its Baseline Credit Assessment (BCA) of 4, which is equivalent to the Aa3 level under Moody's Global Rating Scale; and (2) strong support enjoyed from its major shareholder, Temasek Holdings (Private) Ltd ("Temasek," Aaa/stable), which owns 50.29% of shareholding interest.

"STE's underlying credit strengths reflect its strategic role as a major supplier of defense products, support services and electronics solutions/services to the Singapore government. It also reflects its enlarged scale and improved product and geographic diversity, global leadership in the niche third-party maintenance repair and overhaul market, solid backlog of orders supporting future revenue, and strong credit metrics," says Kathleen Lee, a Moody's VP/Senior Analyst.

"At the same time, the BCA rating also considers the company's small size in the context of major global aerospace and defense contractors, the challenging global aviation sector conditions, and its high level of dividend payments which has led to negative free cash flow in the last few years," adds Lee, also Moody's lead analyst for STE.

Moody's expects that the Singapore government's increasing defense budget spending and the company's strong order book on hand should continue to enable STE to report stable operating performance over the medium term, even in the face of a challenging macro environment. However, the company's balance sheet is likely to switch from a historically net cash position to a net debt position over the next two years, if it continues with its high dividend payout policy.

STE's rating is highly sensitive to changes in Moody's assessment of the likelihood of support from Temasek. Accordingly, the rating would be downgraded if evidence emerged of a weakening in support from Temasek, such as reduction in ownership, or increasing debt leverage without either adjusting dividend policy or a capital injection from Temasek.

The outlook of the Aaa rating is stable, reflecting Temasek's stable outlook. Moody's expects that STE will continue to generate relatively stable earnings and enjoy good access to the banking and capital markets. Furthermore, Moody's expects that its management will not take on significant fully debt-funded acquisitions, and will maintain its adjusted net debt to EBITDA at no more than 1x.

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

Downward pressure could emerge if: (a) Ministry of Finance's special share is converted to an ordinary share to signify lower support from the Singapore government; (b) the relationship between Temasek and STE changes, including a reduction in ownership below 50.1%; and/or (c) a downgrade in the rating of Temasek.

In addition, a consistent deteriorating financial profile would also be negative for STE's ratings. This could be due to (i) further pressure on the company's profit caused by weak market conditions; and/or (ii) increasing leverage, arising from new acquisitions, substantial capital expenditures, a shrinking order book, or a high level of dividend payments, with the result that its credit metrics are no longer supportive of a Aa3 level, such as Adjusted Net Debt/EBITDA exceeding 1x on a sustained basis

The last rating action on STE was taken on 14 August 2005 when its rating was affirmed at Aaa with a stable outlook.

The principal methodology used in rating STE was the Global Defense Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory.

Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

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. It is 50.29% owned by Temasek Holdings Pte Ltd (Aaa), a Singapore Government's investment company.

Headquartered in Singapore, STE is an integrated defense and engineering group operating in 24 countries and 42 cities. It offers products and services in four sectors, namely Aerospace, Electronics, Land Systems and Marine. It had total assets of SGD5.99 billion as at end-December 2008.

Singapore
Kathleen Lee
Vice President - Senior Analyst
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Singapore
Tony Tsai
Senior Vice President
Corporate Finance Group
Moody's Singapore Pte Ltd.
JOURNALISTS: (852) 2916-1150
SUBSCRIBERS: (65) 6398-8308

Moody's assigns Aaa to STE's MTN program; outlook stable
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