profile search
latest updates
Press Release
21 Mar | Wednesday
RAM Ratings puts UMW’s AA2 sukuk rating on Rating Watch Positive

RAM Ratings has placed the AA2 rating of UMW Holdings Berhad (UMW or the Group)’s RM2 billion Islamic MTN Programme (2013/2028) on Rating Watch with a positive outlook. This is premised on UMW’s proposed acquisitions (announced on 9 and 13 March 2018) which could result in the Group owning a controlling stake in Perusahaan Otomobil Kedua Sdn Bhd (Perodua) and MBM Resources Berhad (MBM). We expect the acquisitions to strengthen UMW’s business and financial profiles. Concurrently, we have assigned a preliminary rating of A1 to UMW’s proposed RM2 billion Perpetual Sukuk Programme, which we have also placed on Rating Watch Positive.

“On acquiring a controlling interest in Perodua, UMW will become Malaysia’s largest automotive group, with a market share of close to half the total industry volume (TIV), from 12.1% achieved through sales of Toyota models in 2017,” points out Kevin Lim, RAM’s Head of Consumer and Industrial Ratings. Perodua has been the market leader for more than a decade, commanding 35.5% of TIV in 2017, which placed it substantially ahead of its biggest competitor, Honda, that held 19.0%. Including Perodua’s complementary models, UMW’s enlarged automotive division offers models in almost all segments, from affordable national compact cars to luxury and large vehicles. Furthermore, the acquisition of MBM will provide access to distribution franchises for Daihatsu and Hino commercial vehicles as well as automotive parts manufacturing, significantly expanding UMW’s range of commercial vehicles and auto-parts. We also foresee synergistic benefits arising from parts procurement, the sharing of technical abilities and common shareholders in Daihatsu Motor Company Limited and Toyota Motor Corporation.

Total consideration for the acquisitions, amounting to about RM1.4 billion, will be almost entirely funded by equity. Nonetheless, up to RM1.1 billion may initially be satisfied through cash payments funded by bridging loans, which in turn will be repaid using proceeds from a rights issuance at a later date. “As the rights issuance is intended to be undertaken on a full subscription basis, we expect its major shareholder to subscribe in full their respective entitlements in the rights issuance,” adds Lim. We also expect the Group to seek underwriting arrangements for remaining rights shares.

MBM’s debts, totalling about RM280 million as at end-December 2017, will be consolidated by UMW, while Perodua is debt-free. Subsequent to the proposed acquisition and rights issuance, we expect UMW’s balance sheet to strengthen, with estimated gearing of about 0.60 and 0.50 times as at end-December 2018 and 2019, respectively (end-December 2017: 0.66 times). Given that Perodua generates substantial earnings and cashflow, UMW’s debt coverage is also anticipated to improve, with estimated OPBDIT debt coverage of 0.30 times for FY Dec 2019 (FY Dec 2017: 0.15 times).

The proposed corporate exercises are expected to be completed by September 2018. Key milestones include the acceptances of offers for the acquisition of MBM from major shareholders and 10% of Perodua shares from PNB Equity Resource Corporation Sdn Bhd on 28 March 2018, UMW’s EGM, the completion of the mandatory offer of remaining MBM shares and the conclusion of the rights issuance.

Meanwhile, the proposed perpetual sukuk is rated two notches below UMW’s long-term corporate credit rating to reflect the risk of deferrable profit distributions and the deeply subordinated right of the sukuk holders to claims in the event of insolvency, consistent with the criteria presented in RAM’s Equity Credit for Corporate Hybrid Securities, April 2016. The proposed hybrid security qualifies for 50% equity credit under our criteria paper. Nonetheless, the deferrable and cumulative periodic distributions are viewed as fixed charges – similar to interest payments on debts. Proceeds from the issuance of the proposed perpetual sukuk will largely be used to repay debts.

RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Analytical contact
Ben Inn
(603) 7628 1024
ben@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

Date of release: 21 March 2018

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad’s

Print Mail Twitter LinkedIn Facebook Google+
Past Articles
2018
April
March
February
January
2017
December
November
October
September
August
July
June
May
April
March
February
January
2016
December
November
September
July
June
May
April
March
2015
June
May
April
March
February
January
2014
December
November
October
September
August
July
June
May
April
March
February
January
2013
December
October
July
May
April
March
2012
December