Published on 04 Dec 2019.
RAM Ratings has reaffirmed the ratings of respective Islamic securities issued by Islamic financing conduits of Khazanah Nasional Berhad (the Company) – the Government of Malaysia’s (GoM) investment arm. All the ratings have a stable outlook (see table below).
Rantau Abang Capital Berhad
RM7.0 bil Islamic MTN Programme
Danga Capital Berhad
RM20.0 bil Multi-Currency Islamic Securities Programme
Ihsan Sukuk Berhad
RM1.0 bil Sukuk Ihsan Programme
Danum Capital Berhad
RM10.0 bil Islamic MTN Programme
The suffix (s) reflects the enhancement of the respective Issuers’ issue ratings beyond their own credit strength, based on Khazanah’s undertaking to top up any shortfall in meeting expected income distributions and capital returns in respect of the 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 ultimately reflect Khazanah’s creditworthiness, premised on its critical link with the GoM. We do not expect Khazanah’s current dual-fund structure to dilute its strategic importance to the government, particularly given that domestic investments deemed strategic to the nation’s development (the Strategic Fund) will still make up a significant portion of the Company’s portfolio and the interests of both parties are naturally aligned. In 2018, the Company announced an intention to rebalance its portfolio into two core segments: (1) the Strategic Fund, with targets returns benchmarked to the yield of a 10-year Malaysian Government Security on a five-year rolling basis; and (2) investments based on commercial objectives (the Commercial Fund) with returns of at least the Malaysian CPI plus 3% on a five-year rolling basis. The GoM’s full ownership of Khazanah (save for one share held by the Federal Land Commissioner), the Company’s crucial function, and anticipated government support in times of financial distress underscore our view that the Company’s ratings should mirror that of its parent. The GoM’s influence over Khazanah’s overall direction and management also remains clear, with the Prime Minister designated as chairman of the Board.
Khazanah’s investment portfolio remains generally diversified and although domestic-centric, spans more than 10 sectors and countries. As at end-August 2019, the portfolio’s top five sectoral exposures in terms of realisable asset value (RAV) were media and communications (16.5%), financial services (16.0%), power (15.9%), healthcare (12.2%) and property (10.7%). Amidst volatile market conditions in both economic and political spheres, Khazanah’s dividend income over interest expense declined to under 1.0 time in fiscal 2018, from average 1.4 times between fiscal 2015 and 2017. The ratio could improve over the long run as the Company aims to further diversify the sectoral and geographical mixes of its Commercial Fund, although this may affect the long-term predictability of its portfolio in view of added uncertainties or event risks associated with future investments. However, the process of entering new markets or industries will likely be gradual. Looking at Khazanah’s past performance in respect of such investments, we believe such initial commercial investments will stay modest as the Company builds up cross-border and new sectoral expertise.
Being at the helm of the GoM’s investment armada and the Company’s ability to leverage on its assets give it superior financial flexibility. The Company is a frequent issuer in both local and global capital markets and can pledge its assets to raise financing, e.g., via exchangeable sukuk. While the coverage provided by the RAV of Khazanah’s portfolio of its liabilities had declined to 2.4 times as at end-December 2018 (2017: 3.1 times), it should improve in line with the Company’s intention to trim its debts to a more sustainable level of RM40 bil over the medium term via asset sales, even as it continues to rebalance its portfolio. Notably, Khazanah’s divestment activities picked up significantly in fiscal 2019, proceeds of which were mostly used to pare down the Company’s pro forma debts to RM50.0 bil as at end-August 2019 (end-December 2018: RM55.0 bil). In view of Khazanah’s more immediate commitments to support weaker investee companies, such as Malaysia Airlines Berhad, and reduce stakes in certain strategic assets, continued market uncertainties may mean a longer gestation period for the Company to substantially de-gear to a more meaningful and sustainable level.
Tan Han Nee
(603) 3385 2529
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
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