KUALA LUMPUR: Standard and Poor’s Ratings Services (S&P) has affirmed its ‘A-’ long-term issuer credit rating on the state of Sarawak, with a stable outlook, coupled with an ‘axAA’ long-term Asean regional scale rating.

At the same time, S&P affirmed the ‘A-’ issue ratings on Sarawak International Inc’s (SII) US$800 million (RM2.8 billion) guaranteed notes (due August 2015), Equisar International Inc’s (EII) US$800 million guaranteed notes (due June 2026), and SSG Resources Ltd’s (SSG) US$800 million guaranteed notes (due October 2022).

The issue ratings are equalised with the state of Sarawak, which is the ultimate owner of SII, EII and SSG, it said in a statement yesterday.

“The stable outlook reflects our expectation that the state will continue its very strong budgetary performance and maintain its exceptional liquidity position over the next two years.

“We also believe Sarawak’s debt burden will stabilise at about 122% of operating revenue from 2015,” it said.

The rating agency also said Sarawak’s operating performance is very strong, with cash operating surpluses that they project to be at an average 69% of its annual operating revenue from 2012 to 2016. It also noted that oil and gas accounts for about one-third of Sarawak’s operating revenue.

S&P expects Sarawak to pay down some of its maturing debt over the next two years without any further borrowing, adding that its direct debt should consolidate to about 122% of operating revenue by 2015.

However, it noted that exposure to market risks remains as US dollar borrowing forms a significant portion of Sarawak’s debt.

As for Sarawak’s liquidity, S&P said the state’s free cash and liquid reserves are sufficient to cover about seven times its debt service over the next 12 months, including a large bullet payment scheduled for next August for the principal repayment of SII’s US$800 million guaranteed notes.

“We estimate that the state’s free cash and liquid assets as at end-2014 can cover 11 times its annual operating expenses.

“The majority of its cash holdings (including the debt sinking fund) are unencumbered. The state’s short-term liquidity risk is minimal and most of its debt obligations are long term in nature,” it said. It also noted that the state’s policy on reserves management is conservative as most of its cash holdings are held in money-market funds and fixed deposits.

This article first appeared in The Edge Financial Daily, on December 16, 2014.