FW: RAM Ratings reaffirms AAA(s) ratings of sukuk issues by Khazanah’s funding conduits

 

Published on 28 Nov 2018.

RAM Ratings has reaffirmed the AAA(s)/stable ratings of Rantau Abang Capital Berhad's RM7.0 billion Islamic MTN Programme, Danga Capital Berhad's RM20.0 billion Multi-Currency Islamic Securities Programme and Ihsan Sukuk Berhad's RM1.0 billion Sukuk Ihsan Programme. Rantau Abang Capital, Danga Capital and Ihsan Sukuk (collectively, the Issuers) are the funding conduits of Khazanah Nasional Berhad (the Company) and had been incorporated for the sole purpose of facilitating the issuance of the Islamic securities.

The suffix (s) reflects the enhancement of the respective Issuers' Islamic securities beyond their own credit strength, based on Khazanah's contractual obligations vis-à-vis its undertaking to top up any shortfall in meeting expected income distributions and capital returns under the Islamic securities, upon their maturity or the occurrence of a dissolution event. In the case of Ihsan Sukuk, Khazanah's purchase undertaking to meet either full or partial repayment (reduced by a pre-determined percentage) of the Sukuk Ihsan is subject to the performance of the underlying sustainable and responsible investment project against targeted indicators.

The enhanced ratings are ultimately indicative of Khazanah's creditworthiness, premised on its critical link with the Government of Malaysia (GoM) and its fairly diversified investment portfolio that comprises strong credit profile investee companies and provide sustainable dividend earnings. Subsequent to a change in government in May 2018 and an overhaul of the Company's board in July 2018, Khazanah had announced an intention to review and restructure its portfolio in line with its key mandate – to distinguish between what are deemed strategic domestic investments and investment decisions based on commercial objectives. Nevertheless, the Company is expected to continue to hold meaningful stakes in investee companies or undertake investments in sectors viewed as strategically important to the country. The GoM's influence over Khazanah's overall direction and management also remains clear, with the Prime Minister designated as chairman of the Board. The GoM's full ownership of Khazanah (save for one share held by the Federal Land Commissioner) further underscores the direct linkage between the two parties. 

After a lacklustre performance for two consecutive years, Khazanah's portfolio realisable asset value (RAV) climbed 8.2% (2016: -3.2% y-o-y) to RM157.2 billion in fiscal 2017, while its net worth adjusted rebounded by 13.2% (2016: -6.2%) to RM115.6 billion. The improvements mainly stemmed from Khazanah's key listed companies and investments in Chinese equities including Alibaba. A recovery in Khazanah's profit before tax to RM2.8 billion in fiscal 2017 (2016: RM4.2 million) reflected these improvements, as well as larger divestment gains, stable dividend earnings, a lower impairment loss on MAB, and some upside in forex gains. 

In the near term, Khazanah's K-7 portfolio RAV and earnings could be affected by current headwinds on the global and domestic front as well as changes in the new government's policies and measures. In 1H 2018, the KLCI was down 5.7%. Over the same period, Khazanah's dividend earnings fell 13.6% y-o-y (unaudited) on an annualised basis. In line with the GoM's objective to reduce its participation in the private sector, the Company may divest some of its stakes in its key listed entities (known as the K-7), particularly those deemed non-strategic. While this could result in reduced earnings visibility and stability, we expect the process to be gradual, and measured against Khazanah's commercial investments in minimising any earnings gap. The Company's continuous emphasis on diversifying its portfolio (44.5% of RAV was derived from abroad as at end-2017), with plans to increase foreign investments and those in 'new economy' sectors that provide a more sustainable stream of revenue and mitigate disruptions, could help strengthen portfolio resilience over the longer term.  

Largely owing to financial support extended to weaker subsidiaries and for the purpose of funding its investment activities, Khazanah's debt level (including wholly owned SPVs and subsidiaries of the Company) remained high. Notwithstanding Khazanah's intention to exit loss-making non-strategic investee companies over the longer term, financial assistance may still be required as long as they remain in its stable. In addition, we do not discount the likelihood of further financial assistance to the government through higher dividend payouts. In fiscal 2017, Khazanah paid RM1 billion of dividends to the government and redeemed RM1.20 billion in redeemable cumulative convertible preference shares issued to the latter. That said, we expect the Company to continue to enjoy easy access to debt capital markets in raising funds. Viewed as a government-related issuer, Khazanah is able to leverage or pledge its assets, consistently keeping the ratio of its portfolio RAV to liabilities at around 3 times (fiscal 2017: 3.1 times). 

 

Analytical contact
Tan Han Nee
(603) 7628 1023
hannee@ram.com.my

Media contact
Pathma Subbiah
(603) 7628 1162
padthma@ram.com.my