Moody’s Investors Services said on Monday it was downgrading ST Engineering’s baseline credit assessment (BCA) to a3 from a2 on expectations the company’s credit profile would deteriorate after its announced acquisition of Newtec.
ST Engineering said late on Wednesday it agreed to buy Belgium-based satellite communications company Newtec Group NV for 250 million euros, or about S$383 million.
“Although the acquisition of Newtec for about S$383 million is relatively small, it comes close on the heels of STE’s last debt funded acquisition of MRA Systems LLC (MRAS) for S$868 million, and signals a shift in the company’s acquisition strategy and a willingness to lever up its balance sheet,” Nidhi Dhruv, a Moody’s vice president and its lead analyst for ST Engineering, said in a statement on Monday.
“The two acquisitions are also significantly larger than STE’s recent history of acquisitions, and expose the company to execution and
integration risks,” Dhruv said.
The acquisitions will be funded mainly with debt, and that would increase ST Engineering’s gross leverage to arounc 2.3 to 2.4 times this year, with levels set to remain above 2.0 times next year, Moody’s said.
“These levels are not in line with the company’s earlier BCA of a2,” Moody’s said.
Dhruv added that ST Engineering was expected to continue to seek acquisitions to upgrade technological expertise and acquire patents, particularly in areas related to its Smart City business.
But with the company’s commitment to paying consistently high dividends — with annual dividends of S$480 million to S$500 million over the past five years — and its debt-funded acquisitions, its cash flow metrics are expected to weaken over 2019-2020, Dhruv said.
However, Moody’s affirmed ST Engineering’s Aaa issuer rating, pointing to the expectation of “very strong” support from the Singapore government through state-owned investment company Temasek Holdings.
“Moody’s expectation of support reflects STE’s importance to Singapore as a strategic contractor and supplier of defense equipment, as well as an employer of highly skilled labor,” the statement said.