RAM Ratings reaffirms ratings of YTL Corp’s debt issues

Published on 24 April 2014

RAM Ratings has reaffirmed the AA1/Stable ratings of YTL Corporation Berhad’s (YTL Corp or the Group) RM500 million MTN Programme (2004/2019) and MTN Programme of up to RM2 billion (2013/2038). YTL Corp is an investment-holding and management company with interests in the power, water and sewerage, cement, property, construction, hotels, telecommunications and IT sectors.

As a diversified conglomerate, YTL Corp has a diversified earnings base mainly derived from the utilities, cement and property investment and development divisions. In 1H FY2014, YTL Power International Berhad (YTLPI), the Group’s utilities arm, remained as YTL Corp’s key revenue and profit spinner, contributing 76% of the Group’s top line and 50% of its profit before tax. On this account, the credit profiles of YTL Corp and YTLPI are viewed as very closely linked. Any deterioration in YTLPI’s credit profile would have a negative impact on YTL Corp’s (and vice versa).

The ratings are reflective of YTL Corp’s diversified income, given that it is a conglomerate with sturdy subsidiaries, particularly those involved in power generation and water and sewerage services under long-term concession agreements. The predictable and stable cashflow from the Group’s concession assets mitigates its exposure to cyclical industries. We expect the superior operating track record of YTL Corp’s regulated assets to support the Group’s financial performance, complemented by stronger contributions from its cement-manufacturing division amid a vibrant domestic construction sector.

Meanwhile, the Group’s capital structure remained constrained by its hefty debt burden of RM33.44 billion as at end-December 2013. Nonetheless, more than 70% of YTL Corp’s debts reside with subsidiaries that are viewed as self-sufficient, and the bulk of these debts are ring-fenced and non-recourse to the Group. We also note that a large portion of the Group’s RM13.30 billion cash resides in YTLPI (YTLPI’s unencumbered cash as at end-December 2013: RM7.26 billion).

Given that YTL Corp depends on dividend and other income repatriations from subsidiaries and associates to service its company-level debt, our assessment focuses on company-level financial indicators. On that note, YTL Corp’s company-level funds from operations debt coverage ratio is projected to be maintained at around 0.14 times over the next 5 years, while its adjusted gearing ratio is expected to remain at 0.6 times in FY Jun 2014 and thereafter reduce to 0.4 times as it tapers down its corporate guarantees. Considering that YTL Corp practices central treasury, we continue to derive substantial comfort from the Group’s ability to tap its subsidiaries for additional dividends.

YTL Corp’s appetite for acquisitions may expose it to additional operations, political, regulatory and currency risks, more so if such investments are in less developed markets and in less mature assets.

Media contact

Chinthamani Thanneermalai

(603) 7628 1013

chinthamani@ram.com.my