Published on 01 Dec 2020.
RAM Ratings has reaffirmed the ratings of the Islamic securities issued by the funding conduits of Khazanah Nasional Berhad (the Company) – the investment arm of the Government of Malaysia (GoM), as follows:
Rantau Abang Capital Berhad
RM7.0 bil Islamic MTN Sukuk Musyarakah Programme (2006/2041)
Danga Capital Berhad
RM20.0 bil Multi-Currency Islamic Securities Programme (2009/2044)
Ihsan Sukuk Berhad
RM1.0 bil Islamic MTN Sukuk Ihsan Programme (2015/2040)
Danum Capital Berhad
RM10.0 bil Islamic MTN Sukuk Danum Programme (2019/2069)
The suffix (s) reflects the enhancement of the issue ratings beyond their stand-alone credit strength. This is based on Khazanah’s undertaking to top up any shortfall in meeting the expected income distributions and capital returns on the sukuk upon their maturity or the occurrence of a dissolution event. In the case of Ihsan Sukuk Berhad, Khazanah’s commitment to meeting either full or partial repayment (reduced by a pre-determined percentage) is subject to the performance of the underlying sustainable and responsible investment project vis-à-vis targeted indicators.
The reaffirmation of the ratings reflects Khazanah’s significance to and critical link with the GoM. Despite the change in government earlier this year, the Company’s long-term mandate to expand the nation’s wealth through its commercial and strategic funds remains status quo. Khazanah’s importance is highlighted by the GoM’s reliance on it to safeguard and support key strategic assets, more so during these challenging times amid the COVID-19 pandemic. The critical role and anticipated support from the GoM in times of financial distress underpin our view that Khazanah’s ratings mirror those of the former (rated AAA/Stable/P1).
Among the sectors Khazanah is invested in, the travel and hospitality segments have been especially hard hit by the coronavirus pandemic. For instance, financially beleaguered Malaysia Airlines Berhad (MAB) is seeking to restructure its capital, debts and costs with key stakeholders. The GoM has entrusted Khazanah to resolve MAB’s myriad issues. Although the Company is envisaged to continue backing MAB within its capabilities, it may consider diverting funds to a sister airline company. Together with other investee companies that require support, we are cautious of substantial outlay that could impinge on Khazanah’s other obligations.
Meanwhile, Khazanah’s investment portfolio remains diversified across more than 10 sectors and countries, although still domestic-centric. As at end-July 2020, its top five sectoral exposures by realisable asset value (RAV) ranged between 11% and 16%. The Company strives to further diversify its portfolio and enhance returns in the long run, by gradually increasing foreign holdings of its commercial fund. That said, venturing into less stable markets or more risky industries may increase the volatility of the fund’s performance.
We are, however, reassured by Khazanah’s measured pace of diversification, particularly into new markets. In fiscal 2019, the commercial fund generated a time-weighted return of 8.3%, surpassing its internal long-term target. Its more recent investment have been decelerating amid a slew of uncertainties. Khazanah’s dividend income-to-interest coverage ratio swelled to a respective 6.2 and 4.0 times in fiscal 2019 and 7M fiscal 2020 (fiscal 2018: 1.0 time), supported by its subsidiaries’ asset divestments. All said, the Company’s dividend income is likely to remain volatile.
As the GoM’s investment arm, Khazanah has superior financial flexibility, as underlined by its frequent debt issuance in both the local and global capital markets. Its RM2 bil Sukuk Danum in May 2020 was oversubscribed. The Company’s portfolio RAV over its liabilities rebounded to 3 times in fiscal 2019 (fiscal 2018: 2.4 times), mainly thanks to its significantly reduced debts. As at end-July 2020, Khazanah’s pro forma debt level had eased to RM46.52 bil (end-2018: RM55.24 bil), the result of debt repayments with proceeds from chunky divestments and dividend income. Leveraging the current low interest rates, we could see its debts inching back up, to fund investments and support investee companies. In the long run, Khazanah intends to keep its RAV debt cover above 3 times.
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