Published on 06 Dec 2021.
RAM Ratings has reaffirmed the ratings of Islamic securities issued by the funding conduits of Khazanah Nasional Berhad (the Company) – the investment arm of the Government of Malaysia – as follows:
Rantau Abang Capital Berhad
RM7.0 bil Islamic Medium-Term Notes (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) indicates that the issue ratings have been enhanced beyond their standalone credit strength. This is based on Khazanah’s contractual obligation to top up any shortfall in meeting 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 meet either full or partial repayment of the sukuk (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 important role and critical link to the Malaysian government. The Company’s long-term mandate to grow the nation’s wealth as well as safeguard and support key strategic assets remains in place. Its crucial function is further highlighted by the government’s Perkukuh Pelaburan Rakyat (Perkukuh) programme, which requires government-linked investment companies like Khazanah to focus on high impact, catalytic and commercially viable investments while prioritising socio-economic outcomes. Khazanah’s critical role and the government’s anticipated support in times of financial distress underscore our view that the Company’s credit strength mirrors that of the government.
Khazanah’s investment portfolio remains diversified across more than 10 sectors, although still domestic-centric. As at end-June 2021, the top five sectoral exposures by realisable asset value (RAV) ranged between 10% to 18%, while the proportion of foreign investments rose to 29% (from 23% as at end-December 2019). Foreign exposure is expected to increase in line with the Company’s aim of further diversifying its portfolio and enhancing returns in the long run. Khazanah’s dividend income to interest coverage improved to 2.7 times in FY Dec 2020 (FY Dec 2019: 1.7 times). However, dividend income weakened in 1H fiscal 2021 and is likely to stay subdued for the medium term, especially under current challenging economic conditions.
In conjunction with the Perkukuh programme, Khazanah has committed on a RM6 bil Dana Impak fund, to be invested over the next five years and funded through recycled capital. A greater focus on catalytic growth may increase Khazanah’s earnings volatility, particularly if the Company ventures into less stable markets or more risky industries. Efforts to diversify and expand the foreign holdings of its existing portfolio could mitigate this risk in the longer term. Based on Khazanah’s track record, we expect the rebalancing process to stay gradual and carefully measured. It remains to be seen if the Company will be able to achieve its long-term targeted rate of return equivalent to the Malaysian Consumer Price Index + 3% on a five-year rolling basis, set at end-2018. Pressured by the effects of the pandemic, Khazanah’s commercial fund generated a two-year time-weighted return of 1.5% up to fiscal 2020.
As the government’s investment arm, Khazanah has superior financial flexibility, as underlined by its frequent debt issuance in both local and global capital markets. Its USD1 bil sukuk raised in May 2021 was well received with better than expected pricing. While the Company’s debts climbed to RM49.07 bil as at end-June 2021 (extended company basis), net gearing improved to 0.95 times (end-2019: RM45.77 bil, 1.06 times) owing to a healthier cash pile. As the recovery of Khazanah’s aviation and tourism investments will continue to be protracted and require ongoing support, the Company may incur more debts. It should nevertheless still be guided by its long-term objective of keeping portfolio RAV to total liabilities cover of above 3.0 times (end-December 2020: 2.9 times).
(603) 3385 2510
Tan Han Nee
(603) 3385 2529
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