KUALA LUMPUR: RAM Ratings has reaffirmed the AA1/Stable ratings of YTL Corporation Bhd
’s RM500mil medium term notes (MTN) programme (2004/2019) and RM2bil MTN programme (2013/2038).
It said on Friday the reaffirmation of the ratings is supported by the ongoing stream of dividend payments from YTL Corp’s operating entities to service its company-level debts.
“Despite an expected decline in the dividend-paying capacity of key dividend contributors such as YTL Cement Bhd and Wessex Water Services Ltd (WWSL), YTL Corp’s debt-servicing indicators remain within our rating threshold, supported by the group’s robust financial flexibility,” it said.
RAM Ratings said the ratings reflect YTL Corp’s strong business profile, backed by its diversified earnings base as a conglomerate.
“Steady contributions from WWSL – the group’s water and sewerage business – as well as stable and predictable income from its real estate investment trusts (REITs) alleviate the downside pressure from the competitive operating landscape of the group’s Singaporean power and Malaysian cement divisions,” it said.
The rating agency placed greater emphasis on YTL Corp’s company-level credit metrics, given that most of the debts of the group’s operating entities are concession- or REIT-related and have no recourse to the holding company.
The ratings also consider the substantial unencumbered cash reserves under the intermediary companies of its key subsidiary – YTL Power International Bhd
(YTL Power), which can be readily repatriated to YTL Corp as and when needed to service its company-level debts.
“In this respect, YTL Corp boasts a superior liquidity position. As at end-June 2018, its RM1.89bil of company-level short-term debts were amply covered by its RM515.12mil of company-level cash and YTL Power’s RM9.68 bil of unencumbered cash holdings,” it said.
RAM Ratings also pointed out YTL Corp's ratings were also supported by the group's robust financial flexibility, as reflected in the quality and equity values of its operating entities as well as those of YTL Power.
“The management has represented that it is able to generate cashflow from the strategic divestment of small stakes in these operating entities, e.g. the partial divestment of its stake in PT Jawa Power in 2011 and the unlocking of cash via the injection of hotel assets into YTL Hospitality REIT
,” the rating agency said.
“Regulated assets owned by YTL Power - such as WWSL and ElectraNet Pty Ltd - increase in value over time, compared to only time-based concessions, the value of which diminish as the concession terms run down,” Davinder Kaur Gill, RAM’s co-head of infrastructure & utilities ratings, said in the statement.
YTL Corp’s robust financial flexibility is balanced by its weaker debt-servicing indicators, as underlined by YTL Corp and YTL Power’s combined operating cashflow (OCF) net debt coverage ratio.
This is due to the expected decline in the dividend-paying capacity of operating entities and a reduction in YTL Power’s unencumbered cash reserves, which will be channelled to fund the equity investment in its Indonesian power project.
The combined OCF net debt coverage ratio is envisaged to hover around 0.24-0.31 times over the next five years (FY June 2018: 0.40 times).
“The projected ratio is very close to the rating threshold of 0.20 times. As such, the rating will experience downward pressure from any major acquisition or investment in new projects if these are not accompanied by an immediate uplift in earnings and dividend-paying capacity,” Davinder said.
While the group recently unveiled plans to acquire hotels in Madrid (Spain) and Perth (Australia), we have been made to understand that these acquisitions will be funded by secured lending; no guarantee has been extended by YTL Corp.
The ratings are moderated by the multiple headwinds faced by the group’s utility businesses, which may further compress its earnings.
“WWSL will be subject to earnings pressure following industry-wide regulatory tightening effective April 2020,” she said.
Despite this, the combined net debt coverage ratio is still envisaged to remain within the rating threshold.
Additionally, excess generating capacity still plagues the Singaporean power market, causing YTL PowerSeraya Pte Ltd to incur a pre-tax loss in 1H FY Jun 2019.
“Considering the lower vesting contract level and intensified competition in the wholesale and retail markets of the Singaporean power sector, we do not foresee a turnaround in earnings in the absence of significant market consolidation,” the rating agency said.
The contract for the 1BestariNet project undertaken by YTL Communications Sdn Bhd is due for renewal on June 30, 2019.
“As the government is likely to call for a fresh tender after that, any non-renewal of the project would worsen YTL Comms’ losses.
“The ratings will be reassessed if financial support is required from YTL Power that causes the combined ratio to fall below our rating threshold on a sustained basis.
The credit profiles of YTL Corp and YTL Power are considered very closely linked. Therefore, any deterioration in YTL Power’s credit profile would have a negative impact on YTL Corp’s (and vice versa),” RAM Ratings said.