This article first appeared in The Edge Financial Daily on March 22, 2018

KUALA LUMPUR: RAM Ratings has placed the AA2 rating of UMW Holdings Bhd's RM2 billion five-year Islamic Medium-Term Notes (MTN) Programme on its rating watch with a positive outlook.

The ratings agency cited the group's proposed acquisitions of a stake in MBM Resources Bhd and Perusahaan Otomobil Kedua Sdn Bhd (Perodua) as catalysts that are expected to strengthen UMW's business and financial profiles, and possibly raise the group's rating.

"Concurrently, we have assigned a preliminary rating of A1 to UMW's proposed RM2 billion Perpetual Sukuk Programme, which we have also placed on rating watch positive," RAM said in a statement yesterday.

On March 9, UMW announced that it is offering to buy a 50.7% controlling stake in MBM Resources for RM501 million, which would increase its stake in Perodua from 38% to 70.6%.

The acquisition of a controlling interest in Perodua would make UMW the nation's largest automotive group, with a market share of close to half the total industry volume, noted Kevin Lim, RAM's head of consumer and industrial ratings.

It will also enlarge the offerings of UMW's automotive division to almost all segments, from affordable compact cars to luxury and large vehicles, RAM said.

"Furthermore, the acquisition of MBM will provide access to distribution franchises for Daihatsu and Hino commercial vehicles, as well as automotive parts manufacturing," the rating agency added.

RAM noted that while the total RM1.4 billion consideration for the acquisitions will be almost entirely funded by equity, up to RM1.1 billion may initially be satisfied through cash payments funded by bridging loans.

This would in turn will be repaid using proceeds from a rights issuance at a later date, the respective entitlements of which is expected to be subscribed in full by its major shareholder.

"As the rights issuance is intended to be undertaken on a full subscription basis, we expect its major shareholder to subscribe in full their respective entitlements in the rights issuance," said Lim.

"We also expect the group to seek underwriting arrangements for remaining rights shares," he said.

Meanwhile, UMW's debt coverage is anticipated to improve as Perodua is debt-free and generates substantial earnings and cash flow.

"MBM's debts, totalling about RM280 million as at end-December 2017, will be consolidated by UMW," RAM said.