What you need to know about Singtel's spectrum bid

The higher prices will result in increased debt.

The recently concluded spectrum rights auction saw prices skyrocket compared to reserve prices due to the aggressive bidding by the telco players, specifically Singtel and StarHub.

According to Moody's Investors Service, the high cost is credit-negative for Singtel as it will further increase debt.

Singtel acquired 40MHz in the 700MHz frequency band, 20MHz in the 900MHz band, and 15MHz in the 2500MHz band for an aggregate price of $563.7m, and plans to fund the spectrum through a combination of cash and additional bank debt.

“The spectrum payment needs to be made upfront, however, Singtel may apply to the Info-Communications Media Development Authority to defer payment of the 700MHz spectrum fees to a date no later than six months prior to the commencement of the 700MHz spectrum rights,” said Moody’s, noting that the spectrum rights in the 900MHz and 2500MHz bands will commence on 1 July, whilst those in the 700MHz band will commence on 1 January
2018 at the earliest.

"Aggressive bidding amongst operators led to the spectrum prices being considerably higher than its reserve prices set by the regulator. For example, the 10MHz lot in 900Mhz frequency which was open to all operators was eventually bought by Singtel for $132m, or around 6.6 times its reserve price of $20m," said Nidhi Dhruv, a Moody's vice president and senior analyst.

Given the potential for competition to intensify in the Singapore mobile market following the entrance of a fourth operator, and the highly competitive operating environment for its Australian subsidiary, Singtel Optus Pty Limited, Moody's expects the primary source of deleveraging to come from absolute debt reduction, as opposed to EBITDA growth.

"Moody's expectation is for Singtel to bring its leverage below 1.8x by December 2017 in line with its Aa3 rating. This implies a reduction in net debt of around $3.0-3.3b absent incremental EBITDA growth in fiscal 2018, according to Moody's estimates," added Dhruv.

Here’s more from Moody’s:

Singtel's higher leverage is somewhat mitigated by its stakes in several non-core assets, some of which the company plans to monetise. In this regard, Moody's expects the company to use the majority of its proceeds from the expected sale of its stake in NetLink Trust (unrated) to reduce debt levels. The deadline for divestment from NetLink Trust is April 2018.

Furthermore, the company needs to embark on a well-defined deleveraging strategy which results in a permanent reduction in debt. Any delay in execution of its deleveraging plans could lead to negative ratings action.

Downward rating pressure could also arise 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 operations in Singapore and Australia or in cash dividends received from overseas associates.

A rating upgrade is unlikely over the next two to three years. However, Singtel's fundamental credit strength may experience upward pressure if overall profitability improves, coupled with a paring down of debt in absolute terms, such that adjusted EBITDA margins exceed 35%-40%, and adjusted net debt/EBITDA falls below 1.3x on a consistent basis (based on cash dividends from associates added back to EBITDA).