Singapore Power divestment a "credit positive": Moody's

It enhances liquidity, reduces leverage.

In a release, Moody's Investors Service announced it has placed on review for upgrade Singapore Power's (SP) Aa3 issuer rating, SP Power Assets' (SPPA) Aa3 issuer and senior unsecured bond ratings, and SPPA's (P)Aa3 Senior Unsecured MTN Program domestic currency rating.

At the same time, Moody's has placed on review for downgrade the ratings of SP's Australian subsidiaries: SP AusNet (A1), 51% held by SP; SPI (Australia) Assets Pty Ltd (SPIAA, A3), wholly owned by SP; and Jemena (A3), wholly owned by SPIAA.

Moody's said its rating actions are in response to the divestment announced 17 May of 60% of SPIAA and 19.9% of SP AusNet to State Grid International Development Limited ("State Grid", unrated).

State Grid's parent company State Grid Corporation of China (Aa3 stable) has expressed strong commitment to its overseas investments as it supports the corporate objective of increasing its global presence and transferring its expertise in sophisticated, large scale power distribution.

Upon completion of the proposed divestment -- subject to the approval of regulatory authorities in Australia and China -- SP will retain 40% of SPIAA and 31.1% of SP AusNet. As a result of the divestment, both SP AusNet and SPIAA will no longer be consolidated in SP's financial statements.

"The divestment is credit positive for SP as, in addition to enhancing liquidity, it will provide SP with the ability to materially reduce leverage, such that FFO to interest would exceed 3.5x and net debt/fixed assets would fall below 60%, on a consistent basis," says Ray Tay, a Moody's Associate Vice President -- Analyst. "The company has not yet announced whether it intends to proceed with a debt reduction."

"The divestment will also reduce SP's exposure to Australia, where new rules governing the revenue-setting process for the utilities sector will challenge the sector's credit profile by reducing the predictability of regulated revenue. SP's Australian assets currently account for around 70% of the company's assets," says Tay, also the lead analyst for SP and SPPA. "Because SPPA's ratings benefit from uplift from SP and are also closely linked to SP's rating, they would be upgraded if the latter is upgraded," adds Tay.

Moody's further notes that the next electricity transmission and distribution (T&D) tariff reset in Singapore was to have taken place in April 2013, but no public announcement has been forthcoming. Once the reset is finalized, Moody's will accordingly assess the credit implications for both SPPA and SP.