RAM Ratings reaffirms AA1 rating of YTL Corp’s debt issue

Published on 16 January 2013

RAM Ratings has reaffirmed the AA1 long-term rating of YTL Corporation Berhad’s (“YTL Corp” or “the Group”) RM500 million Medium-Term Notes Programme (2004/2019); the long-term rating has a stable outlook. YTL Corp is an investment-holding and management company with interests in power generation and transmission, water and sewerage services, cement manufacturing and trading, property investment and development, construction, hotels, telecommunications and information technology.

The rating reflects YTL Corp’s strong business profile by virtue of its diversified overseas investment portfolio. The Group’s subsidiaries in various industries are viewed to have solid, entrenched positions in their respective sectors. YTL Corp’s key business divisions have managed to sustain their profit performances through the years. Furthermore, the steady and predictable cashflow from the Group’s utilities division mitigates its exposure to cyclical industries. The superior operating track record and stable earnings of its regulated assets are expected to remain the anchor for the Group’s financial performance, complemented by the anticipated stronger contributions from its cement-manufacturing division amid our positive outlook on the construction sector.

The Group’s liquidity position is deemed healthy, with a RM13.34 billion cash pile against RM11.55 billion of short-term debts as at end-June 2012. While YTL Corp’s RM1.35 billion of company-level cash reserves and short-term investments fell short of its RM2.41 billion of short-term liabilities, we derive substantial comfort from the Group’s ability to tap its subsidiaries for additional dividends, complemented by its strong banking relationships. Furthermore, we maintain a favourable view on YTL Corp’s financial flexibility, based on its solid reputation and commendable operating track record.

Meanwhile, the rating remains constrained by the Group’s highly leveraged balance sheet. Its operating-lease-adjusted debt of RM29.21 billion as at end-June 2012 translates into adjusted gearing and net gearing ratios of 2.07 times and 1.14 times, respectively. Notably, most of the Group’s debts reside with entities that are viewed to be self-sufficient; based on our understanding, these debts are concession-related, ring-fenced and non-recourse to YTL Corp. At company level, YTL Corp’s adjusted gearing ratio (adjusted to include RM1.50 billion of corporate guarantees extended to its subsidiaries) had eased to 0.56 times as at end-June 2012 (end-June 2011: 0.66 times), although its adjusted net gearing ratio had weakened from 0.28 to 0.35 times due to its smaller cash pile. Looking ahead, YTL Corp’s funds from operations debt coverage ratio (company-level) is projected to hover around 0.16 times over the next 2 years, before rising above 0.2 times in fiscal 2015, after the maturity of debts that it has guaranteed.

We note that YTL Corp remains on the lookout for acquisitions to further expand and diversify its earnings and asset base. While this could mean potential upside for its earnings, we are cautious about the possible risks that may be introduced. Furthermore, debt-funded acquisitions (whether wholly or partly) or acquisitions by its subsidiaries that necessitate corporate guarantees from YTL Corp may exert additional strain on its financial position and its rating. In this context, it is expected that YTL Corp will consider the impact of such acquisitions on the Group’s balance sheet and ensure that any such debt will be adequately supported by the returns generated.

Media contact

Lee Chai Len

(603) 7628 1192

chailen@ram.com.my