RAM Ratings reaffirms AAA/P1 ratings of Khazanah’s RM10 billion Sukuk Musyarakah issued through Rantau Abang Capital

Published on 17 August 2012

RAM Ratings has reaffirmed the AAA/P1 ratings of Rantau Abang Capital Berhad’s (“RACB”) RM3 billion Islamic Commercial Papers/Medium-Term Notes Programme. At the same time, the AAA rating of RACB’s RM7 billion Islamic Medium-Term Notes Programme has also been reaffirmed. Both long-term ratings have a stable outlook. The securities are collectively known as “the Sukuk Musyarakah”. RACB, a wholly-owned subsidiary of Khazanah Nasional Berhad (“Khazanah” or “the Company), was incorporated to facilitate solely for the issuance of the Sukuk Musyarakah.

Under the transaction, a Musyarakah partnership had been established between Khazanah and RACB; the capital returns and periodic profit payments on the Sukuk Musyarakah stem from an investment portfolio consisting of Shariah-approved shares and assets owned by Khazanah. The ratings of the Sukuk Musyarakah ultimately reflect the credit strength of Khazanah, in its capacity as the Purchase Undertaking Obligor; the Company will purchase the specific portfolio units from RACB at a pre-agreed price upon maturity or a dissolution event.

RAM Ratings’ view on Khazanah’s credit standing is largely premised on the likelihood of extraordinary support from the Government of Malaysia (“GOM”), if required. This is based on Khazanah’s strategic importance to the GOM given the Company’s interests in sectors that are strategically significant to the nation’s economy and strong links with its sole shareholder, the GOM. Khazanah has been mandated to not only spearhead the transformation of government-linked companies (“GLCs”), but also to drive and spur one of the nation’s key developments, i.e. Iskandar Malaysia. Our assessment also takes into account the Company’s highly diversified investment portfolio that comprises listed GLCs operating in stable and defensive industries. This yields recurring dividend income for the Company, along with superior financial flexibility in tapping the debt markets for refinancing or additional funding.

Khazanah’s top line jumped 68.0% to RM8.3 billion in fiscal 2011, mainly attributable to a one-off RM3.8 billion dividend following the privatisation of PLUS Expressways Berhad and the latter’s joint acquisition by the EPF and the UEM Group. Correspondingly, the Company’s operating profit expanded RM3.4 billion, which boosted its return on capital employed to 11.8% (fiscal 2010: 3.2%). Looking ahead, we expect Khazanah’s top line and profitability to normalise, remaining dictated by the performance of its investee companies, the progress of its divestment exercise and overall market conditions.

Notably, Khazanah’s balance sheet had improved as at end-fiscal 2011, although its debt level remained reasonably high at RM32.0 billion (end-fiscal 2010: RM36 billion). Excluding amounts owed to related companies, its gearing ratio had eased to 1.1 times as at the same date, attributable to debt repayments and RM3 billion capital injection by the GOM. Concurrently, the Company’s operating profit before depreciation, interest and tax debt coverage strengthened from 0.13 times to 0.24 times over the same period. However, RAM Ratings opines that Khazanah’s improved debt-protection metrics may not remain at this level given the expected normalisation of the Company’s profitability. The valuation and timing of Khazanah’s divestments may be affected by the more subdued global economy, thereby raising the possibility of heftier borrowings to fund its future acquisitions. That said, the Company has very minimal refinancing risk given its superior financial flexibility.

Media contact

Tan Han Nee

(603) 7628 1023

hannee@ram.com.my