FW: RAM Ratings reaffirms AAA(s) ratings of sukuk issues by Khazanah via Rantau Abang Capital, Danga Capital and Ihsan Sukuk

 

Published on 16 Oct 2017.

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 as well as Ihsan Sukuk Berhad’s RM1.0 billion Sukuk Ihsan Programme. Rantau Abang Capital, Danga Capital and Ihsan Sukuk (collectively, the Issuers), the funding conduits of Khazanah Nasional Berhad (the Company or Khazanah), had been incorporated for the sole purpose of facilitating the issuance of the Islamic securities.

The enhanced ratings ultimately reflect the creditworthiness of Khazanah. We view Khazanah to have a critical importance to the Government of Malaysia (GoM) given its strategic role in the country’s economy with its shareholdings in companies vital to the country. Coupled with its direct linkage to the GoM with the latter’s full ownership¹ and through its board representation, we view Khazanah as an extension of the GoM and equate the Company’s rating to that of the latter. 

The suffix (s) reflects the enhancement of the respective Issuers’ Islamic securities beyond their own credit profiles, based on the contractual obligations of Khazanah vis-à-vis its undertaking to top up any shortfall in meeting the expected income distributions and capital returns under the Islamic securities, upon maturity or a dissolution event. For Ihsan Sukuk, Khazanah’s purchase undertaking to meet either the 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 (SRI) project against targeted indicators.

In fiscal 2016, Khazanah’s portfolio realisable asset value (RAV) dropped 3.2% y-o-y to RM145.3 billion while its net worth adjusted (NWA) declined 6.2% y-o-y to RM102.1 billion, although overall trend in long-run value creation remains positive. These were primarily due to general weaknesses in global market conditions which affected the telecommunications (Axiata Group Berhad) and, to a smaller extent, the aviation (Malaysia Airlines Berhad (MAB)) and healthcare (IHH Healthcare Berhad) sectors. Although its dividend earnings improved to RM2.7 billion (fiscal 2015: RM2.4 billion), it was eclipsed by the 35.1% decline in its divestment gains. This, on top of unrealised losses in the fair value of its financial assets and further provisioning of RM1.55 billion impairment losses on its investments and receivables, mainly in relation to aviation (fiscal 2015: RM1.68 billion), had slashed its profit before tax to RM4 million (fiscal 2015: RM500 million) and turned its profit after tax into negative in fiscal 2016. 

In line with its strategy of seeking higher-yielding investments, Khazanah has been gradually increasing its exposure to higher-growth emerging markets and sectors as well as opportunistic pre-IPO investments, to yield better returns – albeit risker – within a shorter span; this sector allocation however remains small at 4% of its portfolio RAV. With the present economic condition and additional risks from key uncertainties such as BREXIT developments and the slow roll-out of US tax reforms, there may be fewer opportunities to realise targeted investment returns over the near to medium term. Furthermore, we expect Khazanah to continue providing ongoing support for weaker investee companies. During the same period, Khazanah helped in repaying Penerbangan Malaysia Berhad’s government-guaranteed bond issue of over RM4 billion (USD1 billion equivalent), significantly affected its net operating cashflow position. Although bulk of the RM6.0 billion conditional investment fund set aside for the turnaround of MAB has been disbursed, the airline, while recovering steadily, has yet to return to the black. We therefore anticipate the upside prospects for the Company’s profitability and cashflow metrics to be limited, unless boosted by special dividend or divestment gains. 

Khazanah’s debt level rose further to RM43.03 billion as at end-December 2016, resulting in higher net gearing ratio of 1.55 times (end-December 2015: 1.40 times). Coupled with its weaker profitability, its interest cover and OPBDIT debt cover thinned to a respective 2.04 and 0.09 times (fiscal 2015: 2.44 and 0.11 times). While the Company traditionally enjoys easy access to the debt capital market, the uncertainties in external factors may affect its funding options and influence the valuation and timing of its divestments. That said, Khazanah’s portfolio has been able to consistently cover its liabilities; its RAV to liabilities ratio stood at 2.9 times as at end-December 2016 (end-December 2015: 3.1 times).

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¹ Save for 1 share held by the Federal Land Commissioner.

 

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

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