PLDT Inc. 'BBB+' Rating Affirmed Despite Higher Country Risk; Outlook Stable

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1 Research Update: PLDT Inc. 'BBB+' Rating Affirmed Despite Higher Country Risk; Outlook Stable Primary Credit Analyst: Wei Kiat Ng, CFA, Singapore (65) ; Secondary Contact: Bertrand P Jabouley, CFA, Singapore (65) ; bertrand.jabouley@spglobal.com Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria Related Research Ratings List MAY 24,

2 Research Update: PLDT Inc. 'BBB+' Rating Affirmed Despite Higher Country Risk; Outlook Stable Overview We expect PLDT to maintain its business fundamentals over the next months despite our assessment of an increase in country risk in the Philippines. We are affirming our 'BBB+' long-term corporate credit rating and our 'axa+' ASEAN regional scale rating on the Philippines-based fixed line and wireless service provider. The stable outlook over the next 12 months reflects our opinion that PLDT will preserve its dominant market position in the Philippines and manage its capital expenditure and shareholder distributions to protect its capital structure. Rating Action On May 24, 2017, S&P Global Ratings affirmed its 'BBB+' long-term corporate credit rating on PLDT Inc. The outlook is stable. We also affirmed our 'axa+' long-term ASEAN regional scale rating on the Philippines-based fixed line and wireless service provider. Rationale We affirmed the ratings on PLDT because expect the company to maintain its business fundamentals over the next months despite our assessment of an increase in country risk in the Philippines. We expect PLDT to continue on its strategic investments to protect its market share and grow data revenues. On May 23, 2017, we lowered our country risk score of Philippines from moderately high risk to high risk. This reflects slightly diminished predictability of future policies as a result of the government's pronouncements on foreign policy and national security. In our view, the Philippines no longer demonstrates an evident strength in its business or financial environment compared to those of similarly ranked countries such as Indonesia and Vietnam. The rating outlook for the sovereign credit ratings on Philippines is stable and we do not expect improvements in the country's economic, financial, and institutional environment in the near term. We expect PLDT to sustain its dominant foothold in the Philippines telecommunications (telecom) market. The company has showcased a degree of resilience and maintained a strong market position in a highly competitive market. Its EBITDA margin is the highest among its regional peers we rate. MAY 24,

3 PLDT's acquisition (together with Globe Telecom) of San Miguel Corp.'s telecom operations in 2016 increases the company's capacity to expand data services. The acquisition provides PLDT with 140 megahertz (MHz) of spectrum across various bands, including the 700 MHz band. We believe that the move will dampen the near-term likelihood of a third player entering the Philippines telecommunication market, cementing PLDT's already strong market position. Our credit assessment of PLDT includes a one-notch positive adjustment to reflect our view that the company will be able to keep its ratio of debt to EBITDA below 2.5x on a sustainable basis. This ratio is at the stronger end of an intermediate financial risk profile range. We also expect the company to continue to rebalance its dividend payments and capital outlays while maintaining its robust competitive position. Our base case assumes the following: PLDT's revenue will grow 3%-4% in 2017 and 2018, based on our expectation that the company's wireless subscriber base will stabilize at 64 million-65 million in spite of a gradual and accelerating attrition in the number of cellular subscribers. Erosion in voice and short message service (SMS)-related average revenue per user (ARPU) due to competitive pressure is likely to temper healthy growth in data and broadband services. The company could make some opportunistic acquisitions in the digital space, but the pace and amount of the potential transactions remain difficult to assess. Our base case includes Philippine peso (PHP) 10 billion in annual spending on external growth. The prioritization of cash towards capex and impairment on past acquisitions could tame the company's appetite for external ventures in the next months, in our view. The company's debt will increase by about PHP9 billion, reflecting net payment for the acquisition of San Miguel's telecom operations. PLDT's capital expenditure will be about PHP46 billion in or about 28% of the company's services revenues. In addition, the company will invest about US$100 million-equivalent over 2016 and 2017 for the rollout of service on the 700 MHz spectrum. The company's dividend payout will be a minimum of 60% of core income, which include recurring profits and gains from asset sales. We do not anticipate any special dividend, given the company's high investments. Based on these assumptions, we arrive at the following credit measures over the next two years: Ratio of debt to EBITDA of 2.0x-2.5x. Ratio of funds from operations (FFO) to debt of about 35%. Liquidity We assess PLDT's liquidity as adequate because the company's sources of liquidity are likely to exceed its uses by 20% in the 12 months to March 31, 2018, and cover uses even if EBITDA falls 15%. Our assessment is based on our view that PLDT could significantly scale down spending if fresh funding was MAY 24,

4 scarce or uneconomical. The company's strong standing in the local and international loan and bond markets supports its funding undertakings. Principal liquidity sources include: Cash and cash equivalents of PHP40 billion as of March 31, FFO that we estimate at about PHP57 billion annually. PHP2 billion installment payment (with the remaining PHP7 billion balance to be received in further installments by June 2020) from the sale of 25% equity interest in Beacon Electric Asset Holdings in Principal liquidity uses include: Short-term debt of PHP17 billion. Limited working capital needs. Minimum capital expenditure of about PHP35 billion. Equity infusions in digital and internet companies that we estimate will not exceed PHP10 billion annually. PHP7 billion balance to be paid to San Miguel at the end of May Dividend payments amounting to at least about PHP13 billion in Outlook The stable outlook on PLDT for the next 12 months reflects our view that the company will continue to have a dominant market position in Philippines' telecom market and a higher EBITDA margin than its regional peers. We expect growth in the company's broadband and data businesses to continue to offset gradually eroding revenue from traditional voice and SMS operations. The outlook also factors in our expectation that PLDT will continue to generate free operating cash flows over the next two years in spite of heavy capital expenditures, and that the company's acquisition appetite will remain moderate. Downside scenario We could lower the rating if PLDT's capital structure weakens, such that the ratio of debt to EBITDA remains above 2.5x on a sustainable basis. This could happen if PLDT's capital spending is higher than we anticipate, or if the company's competitive position or operating performance deteriorates materially due to aggressive competition. Upside scenario We may upgrade PLDT if: We raise the foreign currency rating on the Philippines (BBB/Stable/A-2; axa/axa-2), which we believe could also result in the raising of the 'BBB+' transfer and convertibility (T&C) assessment for the country; and We raise our assessment of the company's stand-alone credit profile. This could happen if PLDT deleverages, such that its ratio of adjusted debt to EBITDA declines to sustainably below 2.0x. MAY 24,

5 Ratings Score Snapshot Corporate Credit Rating: BBB+/Stable/-- Business risk: Satisfactory Country risk: High Industry risk: Intermediate Competitive position: Strong Financial risk: Intermediate Cash flow/leverage: Intermediate Anchor: bbb Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Satisfactory (no impact) Comparable rating analysis: Positive (+1 notch) Stand-alone credit profile: bbb+ Related government rating: BBB Rating above the sovereign: (no impact on SACP) Related Criteria General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017 General Criteria: S&P Global Ratings' National And Regional Scale Mapping Tables, June 1, 2016 Criteria - Corporates - General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 General Criteria: National And Regional Scale Credit Ratings, Sept. 22, 2014 Criteria - Corporates - Industrials: Key Credit Factors For The Telecommunications And Cable Industry, June 22, 2014 General Criteria: Methodology: Industry Risk, Nov. 19, 2013 General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology: Ratios And Adjustments, Nov. 19, 2013 Criteria - Corporates - General: Corporate Methodology, Nov. 19, 2013 General Criteria: Group Rating Methodology, Nov. 19, 2013 General Criteria: Ratings Above The Sovereign--Corporate And Government Ratings: Methodology And Assumptions, Nov. 19, 2013 General Criteria: Methodology: Management And Governance Credit Factors MAY 24,

6 For Corporate Entities And Insurers, Nov. 13, 2012 General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009 Criteria - Corporates - General: 2008 Corporate Criteria: Rating Each Issue, April 15, 2008 Related Research Country Risk Assessments Update: May 2017, May 23, 2017 Ratings List Ratings Affirmed PLDT Inc. Corporate Credit Rating ASEAN Regional Scale BBB+/Stable/-- axa+/--/-- Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at for further information. Complete ratings information is available to subscribers of RatingsDirect at and at All ratings affected by this rating action can be found on the S&P Global Ratings' public website at Use the Ratings search box located in the left column. MAY 24,

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