OREANDA-NEWS. Fitch Ratings has affirmed Singapore Telecommunications Limited's (Singtel) Long-Term Foreign and Local-Currency Issuer Default Ratings (IDRs), as well as its senior unsecured rating, at 'A+'. The agency has also affirmed the company's wholly owned subsidiary Singtel Optus Pty Limited's (Optus) Long-Term Foreign-Currency IDR and senior unsecured rating at 'A'. The Outlook on both IDRs is Stable.

KEY RATING DRIVERS

Low Rating Headroom: Fitch expects Singtel's funds flow from operations (FFO)-adjusted net leverage for financial year ended March 2016 (FY16) to increase to 2.1x (FY15: 1.8x) following the USD810m acquisition of managed security company Trustwave Holdings, Inc. (Trustwave). The Stable Outlook reflects our expectation that Singtel will deleverage to 1.7x-2.0x in FY17-FY18, near the level above which we may consider negative rating action.

More Acquisitions Likely: Fitch believes Singtel will continue to undertake more acquisitions, if suitable opportunities arise. We believe the realignment of Digital Life (DL) focus in April 2015 underpins a more refined strategy for the group, and for future acquisitions by DL. Our rating factors in a certain level of acquisitions; we expect Singtel to have sufficient headroom for another SGD300m in total acquisitions over FY16-FY17, on top of the Trustwave deal.

Acquisitions above this level may affect the rating, while Singtel will benefit from an earlier-than-expected divestment of NetLink Trust - ahead of Infocomm Development Authority's (IDA) mandated April 2018 deadline - which should provide additional financial flexibility.

Flat FY16 FFO: FFO is likely to be around SGD5.3bn-5.4bn (FY15: SGD5.4bn) in FY16, as slow growth in Singapore and Australia offsets continuing EBITDA losses in DL. We expect Trustwave will turn around much faster than DL, given its asset-light business and established presence in North America. Singtel has set a target for Trustwave to be EBITDA positive in the second year of acquisition.

High Capex: We estimate group annual cash capex of SGD2.3bn-2.4bn in FY16-FY17 (FY15: SGD2.2bn), driven by capex expansion in Australia. Singtel will spend SGD2.3bn in cash capex in FY16, which mainly includes a new data centre in Singapore, 4G expansion in Australia, and a new unified billing and customer care systems. Cash flow from operations in FY16 is likely to fully cover capex and dividend commitments.

Parental Support: Singtel's 'A+' ratings continue to factor in a one-notch support above its standalone ratings, to reflect Singapore's (AAA/Stable) majority state ownership (51% at end-May 2015) through Temasek Holdings Pte Ltd. Singtel is Temasek's largest investment, accounting for about 13% of total investment value of SGD223bn at end-March 2014.

Strong Regional Play: Singtel's standalone credit profile of 'A' factors in its diversified cash flows through its solid market position in Singapore, No.2 market position in Australia through Singtel Optus (A/Stable), and participation in leading market positions in India, Indonesia, the Philippines and Thailand through associates.

Strong Optus-Singtel Link: The strong linkage between Optus and Singtel leads to an equalisation of Optus's rating with Singtel's standalone credit profile of 'A'. Singtel owns 100% of Optus, and maintains full control on the board. Fitch estimates low-single-digit revenue growth for Optus (FY15: 3.8%) and stable absolute EBITDA in FY16.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
- Revenue to grow by the low-single-digit percentage in FY16-FY18
- Operating EBITDAR margin of around 31% as better data monetisation offsets declining roaming revenues
- Cash capex/revenue of around 13%; this excludes spectrum fees
- Total acquisitions of SGD300m during FY16-FY17, in addition to the USD810m Trustwave deal
- Divestment of Singtel's stake in NetLink Trust to 25% in FY18
- Dividend payout of 73%-74% during FY16-FY17 (FY15: 74%).

RATING SENSITIVITIES

Rating Sensitivities - Singtel

Positive: There is limited upside potential for Singtel's rating in the short to medium term, although developments that may, individually or collectively, lead to positive rating action include:
- FFO-adjusted net leverage falling below 1.0x, with positive post-dividend distribution FCF on a sustained basis
- Tangible evidence of support from Temasek, including an equity injection or a legal guarantee on Singtel's debt

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- FFO-adjusted net leverage of above 2.0x (FY15: 1.8x) on a sustained basis
- FFO fixed-charge coverage below 7.0x (FY15: 8.6x) on a sustained basis
- Weakening of ties between Temasek and Singtel, indicating a change in implied support.

Rating Sensitivities - Optus

Positive: Developments that may, individually or collectively, lead to positive rating action include:
- An upgrade of Singtel's standalone ratings or a strengthening of the linkage between Singtel and Optus (eg parental legal guarantees)

Negative: Developments that may, individually or collectively, lead to negative rating action include:
- A downgrade of Singtel's standalone ratings or a weakening of the linkage between Singtel and Optus.

LIQUIDITY

Fitch expects Singtel and Optus to cover short-term debt maturities comfortably over FY16. Their respective cash balances at end-March 2015 stood at SGD563m and AUD105m, against debt obligations of SGD174m and AUD2m due in FY16. Liquidity is strengthened by their access to capital markets and banks - in light of their market and financial positions.

FULL LIST OF RATING ACTIONS

Singapore Telecommunications Limited
- Long-Term Foreign-Currency IDR affirmed at 'A+';
- Long-Term Local-Currency IDR affirmed at 'A+';
- Senior unsecured rating affirmed at 'A+'.

Singtel Optus Pty Limited
- Long-Term Foreign-Currency IDR affirmed at 'A';
- Senior unsecured rating affirmed at 'A'.