This article first appeared in The Edge Financial Daily, on February 12, 2016.

KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) has assigned a preliminary AA-IS rating to Sime Darby Bhd’s proposed RM3 billion perpetual subordinated sukuk programme, although its outlook stood at negative.

In a statement yesterday, the rating agency said the negative outlook was consistent with the revised outlook on the plantation group’s RM500 million Islamic commercial paper/Islamic medium-term note (ICP/IMTN) programme to negative from stable.

The negative outlook revision factors in the slower-than- expected pace of measures initiated to address the substantial increase in group borrowings, following the debt-funded acquisition of the New Britain Palm Oil Ltd  for RM6 billion in March 2015, said MARC.

“Some of the group’s earlier plans to pare down its debt have been postponed owing to weak market conditions. Additionally, the group’s key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics,” MARC said.

Nevertheless, MARC has also affirmed the MARC-1ID/AAAID ratings on the group’s existing RM4.5 billion IMTN programme and the RM500 million ICP/IMTN programme, with a combined limit of RM4.5 billion.

The rating agency noted that Sime Darby’s plan to issue the perpetual sukuk is a major first step to improve the group’s liquidity profile. “As the perpetual sukuk receives 50% equity credit in line with MARC’s approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.6 times, assuming the full drawdown of RM3 billion is utilised for debt repayment,” it added.

Sime Darby closed 0.06 sen or 0.78% higher at RM7.74, valuing it at RM48.97 billion. It was one of the top gainers on the bourse yesterday.