FW: RAM Ratings reaffirms Malaysia Airports' ratings

 

 

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From: Tengku Intan Junhazidah [mailto:intan@bpam.com.my]
Sent: Monday, December 18, 2017 10:05 AM
To: 'Pricing'
Cc: 'DCM'
Subject: RAM Ratings reaffirms Malaysia Airports' ratings

 

 

 

Published on 15 Dec 2017.

 

RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Malaysia Airports Holdings Berhad’s (MAHB or the Group) RM2.50 billion Senior Sukuk Programme (2013/2033) (senior sukuk) and RM2.50 billion Perpetual Subordinated Sukuk Programme (2014/2114) (perpetual sukuk). The AAA(s)/Stable rating of the Group’s RM3.10 billion IMTN Programme (2010/2025), issued via wholly owned Malaysia Airports Capital Berhad (MACB) (see Table 1), has also been reaffirmed.

The rating reaffirmation is premised on its performance which largely came in within expectations, and our belief that MAHB’s credit metrics will remain at levels appropriate for its ratings despite potentially sizeable capex in coming years. In addition, continued improvement in its Malaysian operations is anticipated to keep driving the Group’s performance as its Turkish operations remain weak in the medium term. While ongoing negotiations on future concession terms introduce some regulatory uncertainties, we do not expect the outcome of the negotiations to be detrimental to MAHB’s credit profile. 

The operating environment in Malaysia continues to improve, with a 9.7% increase in passenger traffic seen in 10M 2017 (2016: 6.1%) and a strong rebound in the more profitable international segment. Passenger numbers in Turkey have likewise shown signs of recovery, although earnings from MAHB’s Turkish operations had been hit by a revised revenue-share arrangement with the local duty-free operator in 2017. Overall, MAHB’s adjusted operating profit before depreciation, interest and tax grew 11.6% y-o-y in 9M FY Dec 2017. As a result, its adjusted funds from operations debt cover (FFODC) advanced to 0.22 times for the period (FY Dec 2016: 0.20 times).

MAHB’s capex is envisaged to rise from 2019 onwards, as it may bear most of the cost of capacity expansion at Kuala Lumpur International Airport 1 and Penang International Airport. We understand that MAHB intends to ultimately recoup most of the capex on airport expansion via better concession terms. A negotiation committee was formed for this purpose in mid-2017 – comprising representatives of MAHB, the Ministry of Transport, Ministry of Finance and the Malaysian Aviation Commission, amongst others. Given the complexity involved, the negotiation process will take time, and is expected to be finalised in mid-2019. 

Expected to be spread out over a few years, the capex (estimated to be in the range of RM2.0-3.2 billion) is anticipated to be financed by a mix of internal funds and debt. Assuming half of the capex is debt funded, MAHB’s adjusted FFODC and gearing are projected to reach a respective 0.20 times and 0.85 times in 2020 (9M FY Dec 2017: 0.22 times and 0.76 times). While these ratios are still within the rating thresholds, they are stretched and there is little headroom for further deterioration at this rating level.

The ratings continue to be supported by MAHB’s strong business position as an airport operator with a near-monopoly in Malaysia, operating all 39 airports owned by the GoM. The ratings are further anchored by overall healthy industry fundamentals. Passengers at airports under Malaysian operations steadily increased between 2008 and 2016 at a CAGR of 7.4%. Meanwhile, Turkey’s aviation sector is supported by the country’s large population, a low aviation-penetration rate as well as the country’s strategic geographical location. 

Moderating the ratings, however, is the regulatory uncertainty stemming from ongoing negotiations on concession terms. The tariff framework under the new regulatory regime (subsequent to the establishment of MAVCOM) deviates from the mechanism under operating agreements signed in 2009 by the GoM and MAHB. We understand that future tariff adjustments are among items to be discussed in the aforesaid multi-party negotiations. 

MAHB’s credit profile is also weighed down by the poor financial showing of its Turkish operations, held under Istanbul Sabiha Gokcen International Airport Investment Development and Operation Inc (ISG). ISG has been loss-making since its inception in 2008. ISG’s adjusted FFODC stayed lacklustre at 0.13 times in 9M FY Dec 2017 and is unlikely to significantly improve anytime soon, given hefty concession fees paid to the Turkish government and the company’s large debt burden. We further note MAHB’s susceptibility to event risk as air traffic is vulnerable to external events, as well as the keen competition the Group faces from other airports within the Asia Pacific region.

The senior sukuk’s creditworthiness reflects MAHB’s credit profile as it ranks pari passu with all of the Group’s other senior unsecured borrowings. The perpetual sukuk, meanwhile, is rated 2 notches below MAHB’s corporate credit rating to reflect the risk of deferrable profit distributions and the deeply subordinated right of the sukuk holders to claims in the event of insolvency. 

 

Table 1: Rating actions

	Rating action	Rating
Malaysia Airports Holdings Berhad
RM2.50 billion Senior Sukuk Programme (2013/2033)	Reaffirmed	AAA/Stable
RM2.50 billion Perpetual Subordinated Sukuk Programme (2014/2114)	Reaffirmed	AA2/Stable
Malaysia Airports Capital Berhad
RM3.10 billion Islamic Medium Term Notes Programme (2010/2025)	Reaffirmed	AAA(s)/Stable
RM1.00 billion Islamic Commercial Papers Programme	Withdrawn*	-

* The rating of the RM1.00 billion Islamic Commercial Papers Programme had been withdrawn after it lapsed. There had been no drawdown from the programme, which was last rated P1/stable.

 

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