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Rating Action:

Moody's downgrades Singtel to A1; outlook stable

21 Jul 2017

Singapore, July 21, 2017 -- Moody's Investors Service ("Moody's") has downgraded Singapore Telecommunications Limited's (Singtel) senior unsecured ratings to A1 from Aa3.

At the same time, Moody's has downgraded to (P)A1 from (P)Aa3 the backed senior unsecured Euro Medium Term Notes programme issued by Singtel Group Treasury Pte. Ltd. Moody's has also downgraded to A1 from Aa3 the backed senior unsecured ratings on all notes issued by Singtel Group Treasury Pte. Ltd, under the unconditional and irrevocable guarantee from Singtel.

The ratings outlook remains stable.

RATINGS RATIONALE

"The downgrade reflects continued weakening in Singtel's key financial parameters -- Debt/EBITDA and RCF/Debt -- over the last two years, fueled by rising absolute debt levels and a willingness by the company to lever up its balance sheet to a level inconsistent with the Aa3 rating," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

Singtel does retain some flexibility in its ability to monetize non-core assets, and in line with our expectation, Singtel has divested 75.01% of its stake in Net Link Trust (NLT) through an initial public offering (IPO).

However, the funds raised of SGD2.29 billion, even if fully deployed for debt reduction, are insufficient to bring the company's leverage below the thresholds set for its previous Aa3 rating.

It remains unclear how much of the NLT divestment proceeds will be used by Singtel towards the permanent reduction of debt.

"As a result, we expect Singtel's leverage, over the medium term, will stabilize at around 2.0x, which is consistent with a A1 rating level. Given its funding needs, including spectrum payments and the acquisition of Turn Inc. for SGD439 million, impending operational challenges in Singapore and Australia, increased competition in key operating markets, and a commitment towards high shareholder returns, the company will not be able to reduce debt organically through incremental EBITDA within the next 12-18 months," adds Dhruv, also Moody's lead analyst for Singtel.

Singtel's investments in its digital businesses are yet to breakeven. The company expects Amobee, a significant contributor to its digital business, to achieve EBITDA breakeven in the current fiscal year.

On the other hand, Singtel holds sizeable equity stakes in a number of regional mobile operators. The value of such investments was about SGD32.8 billion as of its last reporting date (March 2017), significantly higher than its adjusted total debt of around SGD14.8 billion.

"While the unrealized value of these investments provides a significant additional source of alternative liquidity in a stress scenario, we do not expect Singtel to monetize these investments to reduce debt levels," adds Dhruv.

Singtel also has stakes in non-mobile associates -- Southern Cross and Singapore Post. The market capitalization of the latter was about SGD3.0 billion as of 31 March 2017 (valuing Singtel's stake at SGD688 million). However, we do not expect the company to monetize these investments in the near-term.

Singtel's commitment towards high shareholder payouts -- coupled with its high capex and spectrum payments -- has resulted in it reporting negative free cash flow since 2015, and the situation will continue to pressure its cash flow metrics.

"It is Moody's expectation that Singtel will also use 25%-30% of the proceeds from NLT's IPO for special dividend payments. We note that Singtel has not paid a special dividend since 2012," adds Dhruv.

Furthermore, Singtel's credit metrics remain strained at a time when the company will face headwinds in its operations in key markets: both Singapore and Australia will have a new mobile operator in 2018; in India Singtel's 36.5%-owned associate, Bharti Airtel Ltd. (Baa3 negative), faces intensified competition following the launch of services by Reliance Jio; and competition is also expected to intensify in Thailand as other operators compete aggressively to gain 4G market share.

"Repositioning the rating at A1 allows Singtel the flexibility to maintain its net leverage at 2.0x, maneuver against impending price competition, maintain shareholder returns at the high end of its dividend payout range of 60%-75%, and pursue its strategy of making small acquisitions in related areas," adds Dhruv.

Singtel maintains a good liquidity profile, supported by its very strong access to the bank and debt capital markets, as evidenced by ongoing debt raisings over the past few years. It also maintains solid interest coverage metrics.

Singtel's A1 rating continues to combine: a) its BCA of a3 reflecting the company's underlying strength, derived from its well-established and geographically diversified business platform; and b) the credit support that Moody's believes Temasek Holdings (Private) Limited (Aaa, stable), which owns 52% of Singtel, is likely to provide in a distress situation, which results in a 2-notch uplift.

The outlook remains stable, reflecting our expectation that Singtel will maintain the competitive strength of its operations in Singapore and Australia, gradually deleveraging profile, and its healthy liquidity.

Singtel's fundamental credit strength may experience upward pressure if overall profitability improves, coupled with a paring down of its debt in absolute terms, such that its adjusted EBITDA margins stabilize in the 30-35% range and adjusted net debt/EBITDA (based on cash dividends being added back to core EBITDA) falls below 1.75-1.80x on a consistent basis.

Downward pressure on the underlying rating would occur if Singtel's leverage metrics weaken further, such that adjusted net debt/EBITDA is in excess of 2.0x on a consistent basis.

Downward pressure could also build if the company 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. A weaker EBITDA margin of below 30% on an ongoing basis would also pressure the rating.

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, or industry developments that materially undermine Singtel's relationship with the government -- these would include a reduction in Temasek's shareholding below 50%.

The principal methodologies used in these ratings were Telecommunications Service Providers published in January 2017 and Government-Related Issuers published in October 2014. Please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

Singapore Telecommunications Limited (Singtel) is the leading integrated communications services provider in Singapore. It is also the second largest integrated telecommunications operator in Australia through its wholly owned subsidiary, SingTel Optus.

Singtel also has a number of investments in cellular operators throughout the region, which give it a regional footprint across 22 countries, covering 638 million mobile subscribers as of 31 March 2017. Singtel is 52%-owned by Temasek, which is wholly owned by the Singapore government.

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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Nidhi Dhruv, CFA
Vice President - Senior Analyst
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
Client Service: 852 3551 3077

Laura Acres
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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