KUALA LUMPUR (Dec 6): RAM Ratings has reaffirmed its AAA(s) ratings with a stable outlook on Islamic securities issued by the funding conduits of the government's investment arm Khazanah Nasional Bhd.
"The suffix '(s)' indicates that the issue ratings have been enhanced beyond their stand-alone 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," the rating agency said.
The Islamic securities involved are the RM7 billion medium-term notes (MTN) issued by Rantau Abang Capital Bhd, RM20 billion multi-currency securities programme by Danga Capital Bhd, RM1 billion MTN by Ihsan Sukuk Bhd, and RM10 billion MTN (which will be upsized to RM20 billion soon) by Danum Capital Bhd.
RAM Ratings analysts Ben Inn and Tan Han Nee wrote that the reaffirmation of the ratings reflects Khanzanah's important role and critical link to the Malaysian government as the state-owned investment arm'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 (GLICs) like Khazanah to focus on high impact, catalytic and commercially viable investments while prioritising socio-economic outcomes.
"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."
They noted that Khazanah's investment portfolio is diversified across more than 10 sectors despite being domestic-centric with the top five sectoral exposures by realisable asset value ranging between 10% and 18% as at end-June 2021, while the proportion of foreign investments rose to 29% from 23% as at end-December 2019.
They also noted that Khazanah's foreign exposure is expected to increase in line with the GLIC's aim to diversify its portfolio further and improve long-term returns.
However, they said Khazanah's dividend income — which weakened in the first half of fiscal year — will likely stay subdued for the medium term amid the current challenging economic climate, as the GLIC's dividend income to interest coverage improved to 2.7 times in the financial year ended Dec 31, 2020 (FY20) compared to 1.7 times in FY19.
Khazanah has committed to a RM6 billion Dana Impak fund which will be invested over the next five years and funded through recycled capital in conjunction with the Perkukuh programme.
RAM Ratings said that Khazanah's focus on catalytic growth — by venturing into less stable markets or more risky industries — may increase its earnings volatility.
However, the agency also said that Khazanah's diversification and expansion of foreign holdings efforts may help mitigate this risk in the long run.
"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," RAM Ratings said.