RAM Ratings has reaffirmed the ratings of Islamic securities issued by the funding conduits of Khazanah Nasional Bhd (the Company), the investment arm of the Government of Malaysia.
Issuer Facility Rating Outlook Rating Action Rantau Abang Capital Berhad RM7.0 billion Islamic Medium-Term Notes (MTN) Sukuk Musyarakah Programme (2006/2041) AAA(s)/Stable Reaffirmed Danga Capital Berhad RM20.0 billion Multi-Currency Islamic Securities Programme (2009/2044) AAA(s)/Stable Reaffirmed Ihsan Sukuk Berhad RM1.0 bil Islamic MTN Sukuk Ihsan Programme (2015/2040) AAA(s)/Stable Reaffirmed Danum Capital Berhad RM10.0 bil Islamic MTN Sukuk Danum Programme (2019/2069)* AAA(s)/Stable Reaffirmed
* Danum Capital is in the process of upsizing the programme limit to RM20 billion.
RAM’s reaffirmation of the AAA (s) ratings reflects Khazanah’s important role as a critical link to the Malaysian government, the rating agency says today, adding that 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,” it said.
RAM said that 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.
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 Bhd, 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.
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 of 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 to a RM6 billion 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.
