Published on 22 Apr 2020.
RAM Ratings is closely monitoring the repercussions of the COVID-19 pandemic on the ratings of Malaysia Airports Holdings Berhad’s (MAHB or the Group) sukuk/IMTN programme. The airport sector is one of the industries most affected by the current pandemic.
Passenger and aircraft traffic volumes at MAHB’s airports across the country have declined sharply, amidst the lockdown and travel restrictions. Even after the lifting of the movement control order, the pace of recovery in demand for air travel is highly uncertain given the weakness in the global economy and the deep financial losses of global airlines amid substantial cuts in flight routes and frequency, thus severely suppressing capacity utilisation of airlines. Apart from weaker passenger traffic volumes, MAHB may also have to provide rebates on rental to airport tenants as well as landing and parking charges. That said, we understand that such concessions are still under negotiation with the Government of Malaysia.
Another area of concern is counterparty risk, with most airline customers facing increasingly tight liquidity if the current situation persists. MAHB’s major customers, Air Asia and Malaysia Airlines, have requested for government support. These two entities collectively accounted for about 70% of MAHB’s domestic aeronautical revenue in 2019.
On a brighter note, MAHB is entitled to discounts on electricity bills and deferments on tax instalments under the Government’s stimulus package. The Group has also taken countermeasures to generate an estimated 20% cut in operating costs this year. These initiatives include reductions in staff, utility and maintenance costs. In addition, the Group will defer most of its capital expenditure. While the traffic recovery would highly depend on the speed and extent at which COVID-19 spread is brought under control at the domestic level as well internationally, we understand that MAHB has engaged in a series of Group-wide operational and financial optimisation plans to strengthen its financial sustainability for the possible long tailed effect of COVID-19.
At this point, we expect the deterioration in the Group’s financial performance and credit metrics to be manageable and not prolonged. This is based on our assumption of marked decline in revenue until 3Q this year and a gradual recovery from 4Q. Under this scenario, MAHB is envisaged to incur a pre-tax loss while its funds from operations debt cover (FFODC) is projected to sink below 0.1 times – short of our rating threshold of 0.2 times. Looking ahead, MAHB may return to the black in fiscal 2021 as demand picks up. Its FFODC could recover to 0.2 times even if its revenue does not fully return to the level of fiscal 2019. The Group’s gearing ratios in both years are anticipated to stay below our downward rating trigger of 1.0 time. Notably, MAHB has a sturdy financial buffer due to its improved credit metrics in recent years.
Given the fluidity and unprecedented nature of the current situation, there may be negative pressure on MAHB’s ratings in the event the length and severity of the pandemic stretch beyond our assumptions. We will maintain close monitoring of the unfolding developments and review our assumptions if warranted.
In the interim, MAHB’s liquidity position is strong, with about RM2.7 bil of cash and liquid instruments (as of 2 April 2020) against RM1.3 bil of short-term debts as at end-December 2019 (including RM1 bil of Islamic MTN maturing in August 2020). We understand that MAHB is in advanced stages of refinancing the maturing Islamic MTN through facilities from several financial institutions.
MAHB’s ratings also reflect a high likelihood of extraordinary support from the Government given its critical role as the operator of Malaysia’s international and domestic airports and the close collaborative relationship between them. The Group currently carries the following issue ratings from RAM:
Malaysia Airports Holdings Berhad
RM2.50 bil Senior Sukuk Programme (2013/2033)
RM2.50 bil Perpetual Subordinated Sukuk Programme (2014/2114)
Malaysia Airports Capital Berhad
RM3.10 bil Islamic Medium Term Notes Programme (2010/2025)
The Senior Sukuk’s rating reflects MAHB’s credit profile; the instrument ranks pari passu with all of the Group’s other senior unsecured borrowings. The Perpetual Sukuk is rated two notches below MAHB’s long-term corporate credit rating, to reflect the risk of deferrable profit distributions and the deeply subordinated rights of the sukukholders to claims in the event of insolvency. The issue ratings under Malaysia Airports Capital Berhad – MAHB’s funding conduit – are linked to the Group’s credit profile because the Islamic structure provides recourse to MAHB, through its obligations under a purchase undertaking.
Karin Koh, CFA
(603) 3385 2508
(603) 3385 2577
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Ratings on Malaysia Airports Holdings Berhad