(The following statement was released by the rating agency)
Sept 27 -
Overview
-- We have revised our assessment of the likelihood of extraordinary
support from the government for Singapore-based rail operator SMRT to
"extremely high" from "very high."
-- We are affirming our 'AAA' long-term corporate credit rating and
'axAAA/axA-1+' ASEAN regional scale ratings on SMRT, and the 'AAA' issue
rating on the company's S$150 million medium-term notes due 2014.
-- We are lowering our stand-alone credit profile on SMRT to 'aa-' from
'aa' on our expectation of financial weakness.
-- The stable outlook reflects: (1) our expectation that SMRT will
maintain its dominant position in the Singapore transport industry; and (2)
the risk that its financial risk profile will weaken to "modest" from
"minimal"; but key ratios should remain above our downgrade triggers.
Rating Action
On Sept. 27, 2012, Standard & Poor's Ratings Services affirmed its 'AAA'
long-term corporate credit ratings on Singapore-based rail operator SMRT Corp.
Ltd. The outlook is stable. At the same time, we affirmed the 'axAAA'
long-term and 'axA-1+' short-term ASEAN regional scale ratings on SMRT. We
also affirmed all the ratings on SMRT's related debt issues and programs.
Rationale
We affirmed the ratings on SMRT to reflect our assessment that the likelihood
of extraordinary government support for the company has increased. In our
view, this support will moderate SMRT's weakened stand-alone credit profile
(SACP). We have lowered the SACP to 'aa-' from 'aa' due to the risk that the
company's financial strength will weaken over the next two years.
In accordance with our criteria for rating government-related entities, we
have revised our assessment of the role between SMRT and the government of
Singapore (unsolicited rating AAA/Stable/A-1+; axAAA/axA-1+) to "critical"
from "very important." The change reflects our view that SMRT now has greater
political importance for Singapore's public transport policy than we
previously expected. This is demonstrated by the government's intense scrutiny
and interventions during rail breakdowns in December 2011. Since then, the
government through its regulating agency, the Land Transport Authority (LTA),
has more directly assured commuters of tighter regulatory supervision over the
quality of services that rail operators provide. LTA has also articulated
better co-ordination with SMRT for upgrading the aging rail network while
maintaining high operational efficiencies.
We believe that SMRT's ability to provide reliable train services is critical
to maintaining Singapore's seamless transport infrastructure. The company has
about 2 million passengers on a daily basis (more than one-third of the
Singapore population in 2012). We expect passenger levels to rise as it
extends the network, and see a favorable industry outlook.
We lowered the SACP because we believe that over the next two years SMRT's
financial risk profile will weaken to "modest" from the current "minimal," as
our criteria defined those terms. For example, in our base-case scenario, we
estimate that the company's adjusted debt-to-EBITDA ratio could deteriorate to
1.5x-2.0x over the next two years from the current negligible net debt
position. In our view, the deterioration will come from SMRT's significant
investment in capital expenditure to upgrade its aging rail infrastructure. We
may raise the SACP again if SMRT's adjusted debt-to-EBITDA ratio and other
credit protection measures recover over the next two years.
Ongoing margin pressure continues to constrain SMRT's ability to generate cash
flow. The pressure on the margin stems from rising wages, higher energy costs,
and increased repair and maintenance expenses as the company conducts more
rigorous routine checks to reduce rail breakdowns and inefficiencies.
Rental from SMRT's properties and advertising revenue should continue to grow
as a percentage of total revenue over the next two to three years. But we do
not believe these segments could significantly shift the group's earnings mix.
We view SMRT's business risk profile as "excellent," based on its dominant
market position in Singapore's rail sector. The profile underpins the
company's stand-alone credit quality.
We understand that SMRT has high spending requirements under a Singapore
dollar (S$) 900 million asset renewal and replacement plan. But in our
base-case scenario, we expect the company's capital spending burden to ease in
fiscal 2013 (ending March 2014) because of timely cost sharing with the
government. We have adjusted the company's debt with cash and short-term
investments in excess of S$40 million, which is the minimum cash we expect
SMRT will need to operate.
In our base-case scenario, we also expect an adjusted ratio of funds from
operations to debt of 60%-80% over the next two years, which is above our
downgrade triggers. We base our estimates on our assumption that passenger
numbers will rise 5%-8% after all Circle Line stations fully open in fiscal
2012 (ending March 2013) and that business conditions will remain favorable.
We expect SMRT's EBITDA margin to drop to about 25% in the year ending March
2013, compared with 28% last year. It should then gradually recover, due to
steady revenue growth and the company's efforts to manage operating expenses.
Source: http://news.yahoo.com/text-p-affirms-smrt-corp-ltd-aaa-ratings-091459134--sector.html
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