RAM Ratings has reaffirmed the AAA/stable rating of Danga Capital Berhad’s RM10 billion Multi-Currency Islamic Securities Programme (ISP).

Published on 09 September 2014

RAM Ratings has reaffirmed the AAA/stable rating of Danga Capital Berhad’s RM10 billion Multi-Currency Islamic Securities Programme (ISP). Danga, a trust-owned special-purpose vehicle, had been incorporated for the sole purpose of facilitating the issuance of the Islamic Securities.
The Islamic Securities are to be issued under the contract of Musyarakah, which involves a partnership among various parties that provide capital towards the financing of a business venture. The rating reflects the credit strength of Khazanah Nasional Berhad (the Company), in its role as the Purchase Undertaking Obligor in this transaction. As such, the ratings of the Islamic Securities reflect Khazanah’s credit strength given the Purchase Undertaking; Khazanah is the ultimate obligor servicing the profit and capital payments under this transaction. Proceeds from the ISP had been utilised to purchase pools of identified Shariah-approved shares and/or assets from Khazanah. The Company will top up any shortfall in the income generated by the Musyarakah venture. It has also undertaken to purchase specific portfolio units from Danga at a pre-agreed price, upon maturity or a dissolution event.
RAM considers Khazanah as an extension of the Government of Malaysia (GOM); the likelihood of extraordinary government support is deemed unquestionable. The expectation of solid systemic support is based on Khazanah’s substantial stakes in key national sectors that are strategic to the Malaysian economy; a ”very strong” link with its owner, the GOM, which is highly unlikely to dilute its ownership; the fact that the Prime Minister is the chairman of its board; and Khazanah’s key role in Malaysia’s economic transformation plan. Our assessment also takes into account the Company’s sectorally diversified investment portfolio that comprises listed GLCs operating in stable and defensive industries, with dominant stakes in key economic segments. This yields recurring dividend income for Khazanah, along with superior financial flexibility in tapping the debt capital market for refinancing or additional funding.
Khazanah’s top line surged 49.9% y-o-y to RM7.1 billion in FY Dec 2013, on the back of special dividends from UEM Group Berhad and Valuecap Sdn Bhd. Moving forward, we do not expect this level of dividend income to be maintained. We envisage Khazanah’s dividend receipts to remain dictated by the performance of its investee companies, the progress of its divestment exercises and the overall market environment. In the past, Khazanah had extended financial support to its weak, non-performing investee companies, including Malaysian Airline System Berhad (MAS) and SilTerra Malaysia Sdn Bhd. Going forward, the written-down investment amount/financial assistance may exert pressure on Khazanah’s profitability and balance sheet, particularly following MAS’s deep losses. 
While Khazanah’s debt level has been trending downwards in the last 5 years, it remained high at RM32.0 billion as at end-December 2013 (end-December 2009: RM36.4 billion). Underpinned by exceptional dividend income in FY Dec 2013, the Company’s operating profit before depreciation, interest and tax debt coverage expanded from 0.13 to 0.20 times. Khazanah’s acquisitions are typically funded by additional borrowings and/or asset divestments from its existing portfolio. While the Company enjoys easy access to the debt capital market, unbalanced global financial conditions may introduce additional elements of uncertainty to its funding options, and influence the valuation and timing of its divestments. That said, Khazanah has minimal refinancing risk given its superior financial flexibility.

Media contact
Yong Keck Phin
(603) 7628 1183
keckphin@ram.com.my