SingTel subsidiary's assets not as critical to Singapore: Fitch

Optus is then less likely to receive government support in case of ultimate need, as its parent SingTel still receives top priority.

Fitch Ratings has affirmed SingTel Optus Pty Limited's Long-Term Issuer Default Rating at 'A'. The Outlook is Stable. Fitch also affirmed Optus's senior unsecured ratings at 'A'.

Under Fitch's 'Parent and Subsidiary Rating Linkage' criteria, the agency has assessed that a strong linkage exists between Optus and its parent Singapore Telecommunications Limited. The strong ties between SingTel and Optus lead to an equalization of Optus's rating with SingTel's standalone credit rating of 'A'.

The assessment of strong linkages is underpinned by SingTel's 100% ownership of Optus and SingTel's majority representation on the board of Optus. Optus is strategically important to SingTel, it contributes 43% of SingTel's consolidated EBITDA and, on average, AUD1bn in dividends annually.

While the linkage between Optus and SingTel is regarded as strong, Optus's rating does not benefit from any uplift associated with sovereign support from Singapore's state-owned enterprise Temasek Holdings Pte Ltd. SingTel is 54% owned by Temasek, the main investment vehicle for Singapore. SingTel's domestic fixed line and mobile infrastructure is important to the Singapore economy. Optus's assets are not, in Fitch's view, as critical to the Singapore economy. As such the agency feels that, in case of ultimate need, SingTel, and particularly its domestic assets, are likely to receive government support in priority to Optus.

On a standalone basis, Optus would be rated at 'A-'. The standalone rating is underpinned by Optus's entrenched number two position (30% market share) in Australia's mobile, fixed voice and fixed internet markets. Optus's market position is further strengthened by the unbundling of the local loop in Australia. The structural separation of local loop infrastructure and telecommunication service provision in Australia (FY12) has led to a more even playing field.

"Optus's margins are likely to improve over the next 12 to 24 months, in tandem with Telstra if price-based competition continues to abate" said Johann Kenny, Director in Fitch's Asia-Pacific Telecommunications, Media and Technology team. "Optus is on the cusp of rolling out a 4G network after completing the acquisition of Vividwireless Group (which holds licences for 2.3GHz spectrum that will be used for Optus's 4G network) and the signing of a joint-venture agreement with Vodafone Hutch Australia ('VHA') to share mobile access points. The role-out of 4G services will bolster Optus's competitive position" added Mr. Kenny.

Optus's ratings could be upgraded if Fitch's assessment of SingTel's standalone credit risk is upgraded as long as Fitch concludes that together legal, operational and strategic ties between Optus and SingTel remain strong. Likewise, the ratings could be downgraded if Fitch's assessment of SingTel's standalone credit rating is downgraded and/or if the agency concludes that the links between SingTel and Optus weaken significantly.

If the ties between parent and subsidiary were to weaken to the extent that the top-down rating approach was not warranted, Fitch would rate Optus on a bottom-up basis. If this were to happen, Optus would be rated either at its standalone level of 'A-' or at 'A' if the agency believed that links, although weakened, warranted a notch of parental support.

Fitch would downgrade Optus's standalone rating of 'A-' should funds flow from operations (FFO) fixed charge coverage fall below 4.5x, and/or projected FFO adjusted net leverage exceed 2x (both on a sustained basis) and/or if projected operating EBITDAR margins fell consistently below 25%.