Credit woes for Temasek Holdings

Abdul Hadhi
Dow Jones Newswires
9 October 2003

Government-linked companies in Singapore, traditionally considered the safest borrowers in the country, are losing some of their credit quality because of greater competition and pressure to expand abroad, Standard & Poor’s Ratings Services said.

At the same time, these companies continue to benefit from their state links and strong domestic market positions, and are creating effective operations internationally, S&P analysts said.

In a report on companies controlled by Temasek Holdings, through which the government has since 1974 maintained a sizeable role in the state’s economy, S&P said the credit quality of such companies would continue to worsen as competition intensified in a more liberalised economic environment. And as credit quality dropped, some of these companies would face higher borrowing costs, it said.

S&P’s caution flags come at a time when more government-linked companies are entering the debt market to raise funds. As if to underscore its point, S&P separately placed Singapore Power’s triple-A long-term ratings on credit watch with negative implications on fears that its credit quality might decline because the 100 per cent Temasek-owned power company soon intends to borrow as much as 4 billion Singapore dollars ($3.37 billion).

S&P pinned part of the blame for the increased credit risk on the 2002 Temasek Charter, a blueprint for growth in which Temasek-owned companies such as Singapore Power, port operator PSA, Singapore Telecommunications, lender DBS Group Holdings and others were to expand overseas, focus on core businesses and enhance shareholder value.

“These directions are not without risk and have actually contributed to an increase in credit risks,” S&P credit analyst Tan Ee-Lin told reporters.

While Singapore companies are under increasing pressure to expand overseas, such expansion isn’t without risks and has led to less-than-impressive performances, S&P said.

For example, the New Zealand government’s recapitalisation package for Air New Zealand in 2002 caused Singapore Airlines, in which Temasek is the major shareholder, to incur substantial losses when the value of its investment in the New Zealand carrier fell.

As for the focus on core business, Mr Tan said a lower recurring revenue base could result from the divestment of non-core assets. Keppel Land, 16.7 per cent Temasek-owned, has been divesting its property-investment business, a segment that generates recurrent-income streams and is regarded by S&P as more favourable than property development.

Looking ahead, S&P Ratings Managing Director Paul Coughlin said “bankers should rely on the stand-alone credit profile of the company” rather than assuming that the Singapore government or its agencies would rescue distressed government-linked companies.

Earlier this year, the government didn’t bail out SingTel’s undersea cable unit C2C when it defaulted on $US592 million ($857 million) of loans, even though SingTel is majority-owned by Temasek.

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