RAM Ratings reaffirms AA2 rating of sukuk issued by UEM’s funding vehicle

Published on 02 October 2013

RAM Ratings has reaffirmed the rating of United Growth Berhad’s (“United Growth”) Islamic Medium-Term Notes Programme of up to RM2.2 billion (2012/2042) (“IMTN”) at AA2/stable. United Growth – a special-purpose company set up to raise the IMTN – is wholly-owned by UEM Group Berhad (“UEM” or “the Company”). The UEM Group (“the Group”) is a diversified conglomerate involved in engineering and construction, expressways, township and property development, and asset and facility management. Through an irrevocable and unconditional Purchase Undertaking between United Growth and UEM, the latter will undertake to purchase the portfolio units from United Growth upon the occurrence of certain events, at a price equal to the exercise price. Given the strong credit link between the 2 entities, the rating of the IMTN reflects the credit risk of the Company.  

The rating is supported by UEM’s favourable corporate lineage, given that it is wholly-owned by Khazanah Nasional Berhad (“Khazanah”), the investment arm of the Malaysian Government. We deem UEM to be important to the Government in view of its stakes in strategic toll roads and its vast land holdings in Nusajaya – part of Iskandar Malaysia, which is a vital growth corridor to the Government. UEM’s relationship with the Government is seen as very close, given its full ownership by Khazanah, and the latter’s board participation and indirect assistance.

The Group has a diversified business profile, with stakes in several strategic domestic toll roads through its indirect 51%-interest in Projek Lebuhraya Usahasama Berhad (“PLUS Berhad”) (held via PLUS Malaysia Berhad (“PLUS Malaysia”)). These expressways have demonstrated strong operating track records, underpinned by their strategic alignments, and are expected to draw resilient traffic flows going forward. In addition, UEM’s liquidity position is deemed solid, backed by substantial cash reserves and money market instruments of 1.2 billion as of July 2013. These amply cover its RM100 million of short-term obligations as of the same date.

Despite the debt-funded restructuring of its domestic toll-road assets, UEM has been receiving dividends from PLUS Berhad (via PLUS Malaysia) up until 31 July 2013. Meanwhile, UEM’s prepayment of a USD270 million term loan in March 2013 had reduced its debt load at company level to RM100 million as of July 2013 (end-December 2012: RM1.1 billion). With no immediate investments and funding needs, UEM expects its debts to remain at the current level, translating into strong operating cashflow debt cover (“CFDC”) of above 1 time in FY Dec 2013. Nevertheless, if UEM is to gear up to fund its investments over the longer run, its operating CFDC could see some dilution.

Apart from PLUS Malaysia, UEM derives dividend income from other subsidiaries and associates, which are involved in cement manufacturing, asset management, and township and property development. These subsidiaries are exposed to the cyclical nature of the respective sectors and less resilient vis-à-vis the Group’s local toll-road business. UEM’s rating is also constrained by the regulatory risk to which its domestic toll-road business is exposed, additional uncertainties from foreign ventures, and the possibility of weaker subsidiaries within the Group requiring financial support from the Company.

Media contact

Karin Koh

(603) 7628 1174

karin@ram.com.my