The rating agency expects the government to remain accommodating and supportive to Khazanah.
PETALING JAYA: Moody’s Ratings (Moody’s) is not expecting Khazanah Nasional Bhd to provide additional financial support to its investee companies beyond the RM3.6bil pledged to Malaysia Aviation Group, the parent company of Malaysia Airlines Bhd’s (MAB), between 2021 and 2025.
In a statement, Moody’s noted that extra financial support to investee companies could strain Khazanah’s credit metrics.
The ratings agency estimated that Khazanah’s internal cash sources might be insufficient to cover its projected cash needs, mainly due to scheduled debt maturities over the next 12 to 24 months, which included revolving credit facilities that get rolled over each year.
“Nonetheless, the company’s strong access to external funding tempers its liquidity risk, as demonstrated by its recent issuance of US$1bil bonds and sukuk in August,” it noted.
To note, sovereign wealth fund Khazanah has raised US$1bil from a five-year US$500mil sukuk wakalah, or Islamic bond, and a 10-year conventional bond offering last month according to a term sheet reviewed by Reuters.
Meanwhile, Moody’s has affirmed Khazanah long-term issuer rating at A3 and BAA3 baseline credit assessment (BCA), with a “stable” outlook.
“The rating affirmation with a ‘stable’ outlook reflects our expectation that Khazanah will generate steady income from its investment portfolio, continue to adhere to conservative financial policies and maintain strong access to external funding,” noted Moody’s vice-president and senior credit officer Maisam Hasnain.
Maisam, who is also Moody’s lead analyst for Khazanah, said the rating agency expects the government to remain accommodating and supportive to Khazanah.
While an upgrade of Khazanah’s A3 rating is unlikely without an upgrade of Malaysia’s sovereign rating, Moody’s noted that Khazanah’s BCA could improve with increased transparency around portfolio assets, including its non-Malaysia-listed investments, sustained liquidity and stronger credit metrics.
“On the other hand, we could downgrade Khazanah’s A3 rating if Malaysia’s sovereign rating is downgraded, or if the likelihood of government support for Khazanah declines.
“For example, if the government implements policies that might weaken the company’s strategic importance,” it said.
Additionally, a downgrade of Khazanah’s BCA is possible if aggressive debt-funded investments raise its market value-based leverage (MVL) above 40%, or if key investee companies underperform, limiting dividend payments.
The rating agency also said a downgrade of Khazanah’s BCA is likely if the company’s cash needs increase substantially due to higher funding support for its non performing investee companies or increased shareholder returns to the government.
“Nonetheless, if Khazanah’s underlying credit fundamentals weaken and its BCA is downgraded by one notch, we could still maintain the company’s A3 rating if the likelihood of government support remains very high,” it added.
However, Moody’s forecasts Khazanah’s financial profile to remain stable over the next 12 to 18 months, with its MVL remaining in the range between 30% and 35% over the next two years as it seeks to use a judicious mix of internal cash and external debt to fund investments.
Moody’s said Khazanah’s A3 rating is supported by the expectation of strong government backing due to 100% ownership by the Malaysian government, government-guaranteed debt and its role as the nation’s sovereign wealth fund responsible for growing the nation’s long-term wealth.
Additionally, its role in supporting and implementing the government’s socio economic objectives and its sizable ownership stakes in strategic Malaysian assets across key sectors, justifies its A3 rating.
Meanwhile, its BCA of BAA3 reflects its ownership in major Malaysian companies that have leading market positions and strong business profiles, conservative financial policies, close ties with the government and solid external funding access.
At the same time, Moody’s noted that the BAA3 BCA considers the high geographic concentration of Khazanah’s portfolio in Malaysia, its exposure to market volatility, which can cause fluctuations in the value of its portfolio, and the limited public disclosures on around half of Khazanah’s portfolio, including its overseas investments.
“Khazanah has publicly stated leverage targets measured by its portfolio realisable asset value and debt to remain within the three times and four times range compared to 2.7 times in 2023.
“Its commitment to operate within this ratio, which we estimate has averaged three times since 2004, will ensure the company continues to take a conversative approach toward growth and diversification,” it noted.
In August, Khazanah and five other government-linked investment companies collectively pledged RM120bil in Malaysia’s GEAR-uP initiative to boost investment in key sectors.
These investments are primarily directed towards high-growth and high value industries such as the energy transition sector, advanced manufacturing especially in the semiconductor space, investments across all life cycles of firms from startups, venture capital to mid-tier companies and finally to support listing of such companies.
“Despite this, we expect Khazanah’s long-term strategic asset allocation target of lowering its geographic concentration risk while optimising returns to remain unchanged.
“Its domestic investments concentration has decreased to 59% of its investment portfolio in 2023 from 74% in 2018,” it added.
