KUALA LUMPUR: Moody's Investors Service has affirmed the Baa2 issuer rating of Axiata Group Bhd which recently announced the proposed merger of its Malaysian operations with Norwegian telecom company, Telenor ASA.
The international rating agency had on Tuesday also affirmed the provisional (P)Baa2 senior unsecured rating on the sukuk issuance programme established by Axiata SPV2 Bhd and the euro medium-term note (EMTN) programme established by Axiata SPV5 (Labuan) Ltd.
Moody’s affirmed the Baa2 rating on all backed senior unsecured notes issued by the entities, which are wholly owned subsidiaries of Axiata.
It also affirmed the rating outlook for Axiata -- one of Asia's largest regional cellular telecommunications providers with approximately 150 million subscribers across 11 countries --remains stable.
Nidhi Dhruv, a Moody's vice president and senior analyst said the rating affirmation reflects the rating agency’s view the merger is broadly neutral for Axiata's credit profile.
"The merger, if consummated, will create a new cellular leader in Malaysia -- effectively doubling Celcom Axiata Bhd (Celcom)'s size, coverage in market operations and improve profitability.
“The reduction in the number of mobile network operators would also partially alleviate competitive intensity in Malaysia that was hurting Celcom's operational and financial profile," he said.
Dhruv also said the deconsolidation of Celcom will reduce Axiata's adjusted leverage to 1.9 times to two times post-merger, as compared with its previous expectation of up to 2.2 times without the merger.
Axiata announced that it has signed definitive transaction agreements for the merger of its Malaysian operations with Telenor ASA. The companies plan to merge Axiata's wholly-owned subsidiary, Celcom and Telenor's49%-owned but consolidated company, Digi.Com Berhad (Digi).
The merger, when successfully completed, will create the largest telecommunications company in Malaysia, Celcom Digi Bhd.
Celcom Digi Bhd will be listed in Malaysia, and Axiata and Telenor will each own 33.1% of it. In keeping with regulatory requirements, Axiata and other Malaysian institutional investors will own over 51% of the merged company. The transaction is expected to complete by the second quarter (Q2) of 2022.
Moody’s noted that post-merger, Axiata would lose access to Celcom's RM1.6bil of cash and cash equivalents as of March 2021. Moody's views cash as fungible between Celcom and Axiata.
However, Axiata will receive cash of RM4.4bil as part of the merger, which somewhat offsets the loss of Celcom cash and will bolster liquidity for the company.
Axiata will receive RM1.99bil (US$480mil) as part consideration upon close of the transaction in 2Q 2022, of which RM890mil (US$215mil) will be used to pay down debt.
Within six months from close of the merger, Axiata will also receive RM2.4bil (US$575mi) as repayment of an existing shareholder loan it has made to Celcom.
“Moody's expects Axiata to use the vast proportion of this cash to pay down debt, helping the company to deleverage. Axiata's management does not expect to pay any special dividend on the back of the merger transaction, although this is subject to a board decision.
"As a holding company, Axiata relies on dividends from its subsidiaries and associates for servicing its debt. The credit impact of the merger would ultimately depend on the dividend policies adopted by Celcom Digi Bhd, however the ratings affirmation assumes that these dividend flows will be reasonably maintained in order to preserve Axiata's cash flow," Dhruv added.
Axiata and Telenor will maximise dividend payouts from Celcom Digi Bhd, subject to free cash flows and leverage considerations at the merged company.
Based on this, Moody's expects dividends from Celcom Digi Bhd to broadly offset loss of dividends from Celcom.
However, Moody's will also evaluate the extent to which Axiata supports debt of the merged company when details become available. Meaningful support of debt at the merged entity would be credit negative for Axiata and elevate leverage.
In addition, post-merger, a greater proportion of Axiata's consolidated cash flows will come from emerging and frontier markets, which enhance Axiata's growth prospects but present risks such as uncertain regulatory regimes and political instability.
However, the breadth of Axiata's holdings and financial discipline at the subsidiary level help mitigate volatility, and regulatory and operational uncertainties in any one country.
Axiata's Baa2 ratings continue to incorporate the extraordinary support that Moody's believes the Government of Malaysia (A3 stable) is likely to provide in a distress situation, which results in a one-notch uplift from its Baseline Credit Assessment of baa3.
The stable outlook reflects Moody's expectation that Axiata will maintain its solid operating and financial profiles, given the increasing dividend contributions from its international subsidiaries.
Moody's expects dividends from Celcom Digi Berhad to broadly offset loss of dividends from Celcom, and that Axiata will not guarantee any debt at the merged company. The stable outlook could be pressured to the extent that these assumptions are inconsistent with the final outcomes.