This article first appeared in The Edge Financial Daily, on July 28, 2016.

KUALA LUMPUR: Several government-linked companies (GLCs) have had their credit ratings downgraded, after the recent downgrade of sovereign local-denominated bonds due to the government’s deteriorating fundamentals in the wake of slowing global growth.

Yesterday, Fitch Ratings downgraded the long-term local-currency issuer default ratings (IDRs) of national oil corporation Petroliam Nasional Bhd (Petronas), insurance companies Etiqa Insurance Bhd and Etiqa Takaful Bhd — both of which are part of the Malayan Banking Bhd group — and MNRB Holdings Bhd’s Malaysian Reinsurance Bhd by one notch.

Nonetheless, Fitch maintained the outlook for these companies at “stable”.

Another GLC that was given a downgrade yesterday was Malaysia Airports Holdings Bhd (MAHB), but in this case, it was prompted by external factors.

Moody’s relegated MAHB’s outlook to “negative”, principally because of the risk of declining traffic at its Sabiha Gokcen International Airport (SGIA) with Turkey’s political climate turning chaotic — after an attempted military coup and two terrorist attacks recently.

Fitch’s downgrade of Petronas follows the downgrade of Malaysia’s long-term local-currency IDR to “A-” from “A”.

The downgrade also extended to Petronas’ foreign-currency IDRs, as Malaysia’s administration can “exert significant influence over its operating and financial policies”, said Fitch. These bonds were downgraded to “A-” from “A”.

“Fitch concluded that Malaysia’s credit profile no longer supports a notching up of the long-term local-currency issuer default rating above the long-term foreign-currency issuer default rating,” the rating agency said in a statement.

Key factors now absent in Malaysia’s local bonds are strong public finance fundamentals against external finance fundamentals, and the erstwhile preferential treatment of local-currency creditors against the foreign-currency ones.

The international rating agency, however, maintained Petronas’ short-term foreign-currency issuer default ratings at “F1”.

At the same time, Fitch said it had downgraded Petronas’ foreign-currency senior unsecured rating and the ratings on debt issued by Petronas Capital Ltd and guaranteed by Petronas to “A-“ from “A”. But Petronas continues to maintain a strong stand-alone credit profile, which Fitch put it at “AA-”.

Although Petronas’ dividend payments to parent Minister of Finance Inc have been lowered, its stand-alone credit profile is now under more pressure as the oil giant has committed to significant investments in major projects amid a prolonged weakened oil price environment.

The group is embarking on the Refinery and Petrochemical Integrated Development project in Pengerang, Johor, which Fitch said would cost Petronas US$16 billion (RM65.28 billion) in total.

And there is also the liquefaction and production facility with its Canadian joint venture, the Pacific NorthWest liquefied natural gas project, which is still pending the receipt of final environmental approval.

Even as the national oil corporation has lowered its dividend payout to the government, oil prices are forecast to recover at a slow pace, it added.

According to the statement, Fitch projects Brent crude to average at US$33 a barrel in 2016. The following year, it will trend up to US$45, and then US$55 in 2018. In comparison, at this time three years ago, the benchmark oil price was above US$100 a barrel.

“Fitch expects Petronas’ free cash flows to remain weak, reflecting the expected slow recovery in oil prices, high committed capex (capital expenditure) and dividend payments,” the rating agency said.

“Petronas’ financial flexibility, however, remains strong as it benefits from lower dividend payments in 2015 and 2016, as well as lower funding costs for its US$5 billion bond issuance in March 2015.”

According to Fitch, Petronas’ cash pile stood at RM116 billion as at March 31, 2016, against debts of about RM54 billion, putting the group in a net cash position. Its leverage, as measured by funds from operations (FFO)-adjusted net leverage, was negative at 0.7 times (a net cash position), and its FFO interest coverage was at 27 times for 2015.

As for MAHB, Moody’s expects SGIA to experience a material decline in passenger traffic growth in the next 12 to 18 months, following a coup attempt that ended on July 16, and terrorist attacks that occurred earlier this year.

“The expected weakness in Turkish operations would be occurring at a time when MAHB’s Malaysian operations are experiencing modest growth following the series of airline disasters that occurred in 2014, as well as the completion of route rationalisation by Malaysia Airlines Bhd in 2016,” said Moody’s vice president and senior analyst Ray Tay in a note.

Moody’s placed MAHB’s issuer rating at “A3”, as there is a three-notch uplift for government-related issuers. Thus, the airport operator’s baseline credit assessment, or its stand-alone credit profile, was lowered to “baa3” from “baa2” — the lowest rating of the rating agency’s investment grades.

“An upward rating trend is unlikely, given that MAHB’s ‘A3’ rating is at the same level as the sovereign rating for the government of Malaysia and the ‘negative’ outlook for MAHB’s rating,” Tay said.