Fitch affirms Malaysia's PETRONAS at 'A'; outlook negative

Fitch affirms Malaysia's PETRONAS at 'A'; outlook negative
Business & Markets 2013
Written by Reuters
Monday, 23 September 2013 17:22

(Sept 23): (The following statement was released by the rating agency)

Fitch Ratings has affirmed Malaysia-based Petroliam Nasional Berhad's (PETRONAS) Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'A', and its Short-Term Foreign-Currency IDR at 'F1'. The Outlook on the Long-Term IDRs remains Negative.

At the same time, Fitch has affirmed PETRONAS's foreign currency senior unsecured rating at 'A', including debt issued by PETRONAS Capital Limited and guaranteed by PETRONAS. PETRONAS Global Sukuk Ltd's USD trust certificates have also been affirmed at 'A'.

Key Rating Drivers
Ratings constrained by sovereign: PETRONAS' Foreign- and Local-Currency IDRs are constrained by Malaysia's 'A' Country Ceiling and 'A' Local-Currency IDR, respectively. PETRONAS is 100%-owned by Malaysia (A-/A/Negative) and the government can exert significant influence over PETRONAS' operating and financial policies.

Foreign-Currency IDR Constrained by Country Ceiling: Notwithstanding government ownership, Fitch believes that PETRONAS's importance in generating foreign currency for Malaysia warrants a foreign currency rating at Malaysia's Country Ceiling (currently, one notch above the sovereign's Foreign-Currency IDR), provided however that actions by the government do not impair the company's currently strong stand-alone financial profile. Fitch revised the Outlook on PETRONAS's Foreign-Currency IDR to Negative from Stable in September 2012 due to sustained high financial commitments to the government, including subsidisation of gas prices via PETRONAS. The Outlook on Malaysia's Foreign- and Local-Currency IDRs was revised to Negative from Stable in July 2013. PETRONAS's Foreign-Currency IDR will continue to be rated higher than Malaysia's at its Country Ceiling, provided the Outlook on the Sovereign ratings become Stable and Fitch considers PETRONAS will continue to maintain its strong stand-alone financial profile, without material deterioration, after satisfying its financial commitments to the state.

Likely fuel price reforms: In Fitch's views, PETRONAS' cash generation could be improved by reforms to address material change in gas pricing. For example, in FY12, foregone gas sales revenue was MYR27.9bn, of which MYR15.6bn came from the power sector, a material amount compared to the Fitch-adjusted EBITDA of MYR109bn in the same period. The Malaysian government is expected to recommence the fuel cost price pass-through (FCPT) mechanism from 2014, where the regulated tariff for electricity will be assessed every six months, in line with the fuel price revision. The last gas sales price increase, which took place in June 2011, was one increase to RM13.70 per million metric British thermal unit (mmbtu) from RM10.70 per mmbtu.

Dividend payout change unlikely in the short-term: In Fitch's view, the Malaysian government is unlikely to accept a materially lower dividend from PETRONAS in the short- to medium-term, given the government's financial requirements. The company has been paying a dividend in the last four years of around MYR30bn. This has, however, reduced to MYR27bn in FY12, which also reflects a lower dividend payout of 57% on FY12 profits. PETRONAS expects future dividend pay-out to reduce. However, any changes to this are predicated on the government's policy and its financial requirements given the company's significant contributions to the government's revenue.

Strong standalone profile: Despite the heavy financial commitments imposed by the government, PETRONAS continues to maintain a strong standalone credit profile. Fitch considers PETRONAS to be Malaysia's strongest foreign currency debtor. The company has benefitted from higher FY12 domestic production, which reverses the declining trend of the previous three years. PETRONAS is addressing a decline in domestic production through production and risk sharing contracts, and enhanced recovery programmes. Its leverage, as measured by funds from operations (FFO), adjusted net leverage, and FFO interest coverage, were negative at 0.7x (ie a net cash position) and 35x, respectively, for 2012.

Rating Sensitivities
Positive: No positive rating action is expected given the ratings' sovereign-imposed constraints. However, future developments that may, individually or collectively, lead to positive rating action include:

- Stabilisation of Malaysia's sovereign rating Outlook.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- Downgrade of Malaysia's Local-Currency IDR and its Country Ceiling.

- Long-Term Foreign-Currency IDR: A combination of the government's policies leading to a sustained deterioration of PETRONAS's currently very strong standalone credit profile, will result in the company's Long-Term Foreign-Currency IDR being downgraded to the Foreign-Currency IDR of Malaysia.