S&P affirms 'A-' long-term issuer credit ratings on Sarawak

Larger Smaller Reset KUALA LUMPUR (Dec 22): Standard & Poor's Ratings Services (S&P) has affirmed its 'A-' long-term issuer credit ratings on Sarawak with a stable outlook.

The rating agency also affirmed the 'axAA' ASEAN scale rating on Malaysia.

At the same time, S&P affirmed the 'A-' issue ratings on the US$800 million notes (due August 2015) of Sarawak International Inc. (SII) and the US$800 million notes (due June 2026) of Equisar International Inc. (EII).

In a statement Thursday, S&P credit analyst Phua Yee Farn said the ratings on Sarawak were affirmed to reflect the state's strong operating balance, robust liquid reserves, and its supportive relationship with the federal government of Malaysia (foreign currency A-/Stable/A-2; local currency A/Stable/A-1; axAA+/axA-1+).

"These factors are weighed against a hefty debt burden, sizable contingent liabilities, which are potentially growing, and, to a lesser extent, an economy concentrated in commodities."

'In with our expectations so far, volatility in the states balances after capital expenditure has subsided since 2007 with the divestment of 1st Silicon, a state-owned wafer fab manufacturer. Sarawak has since recorded four consecutive years of surpluses after capital accounts,' said Phua.

S&P said a key supporting factor for Sarawak was the state's extremely strong liquidity position.

Its large holdings of free cash and liquid assets provide ample coverage for debt servicing, and comfortably offer Sarawak the capacity to face potential fiscal shocks, it said.

The robust liquidity position also acts as a buffer against the state's large un-hedged U.S. dollar debts, and mitigates short-term exposure risks, it said.

'The state government has a supportive relationship with the ruling coalition, Barisan Nasional (BN).

'But this could affect the state should the political composition at the central or state level change drastically,' it said.

S&P said Sarawak's very high direct and tax-supported debt constrains the ratings on the state.

'We estimate that Sarawak's gross tax-supported debt burden reached 238% of revenues in 2011, much higher than for similarly rated peers.

'Nevertheless, the state remains in a strong overall net creditor position,' it said.

S&P said the other risks included the emergence of contingent liabilities stemming from the renationalisation of Sarawak Energy Bhd. (SEB). In our opinion, should SEB no longer be financially self-supporting, the contingent liability would translate into added tax-supported debt for the state.

Another credit constraint is the state economy's concentration in the resource sector, it said.

The sector accounts for about half of Sarawak's GDP, and this concentration could negatively affect the state should there be a prolonged downturn in commodities prices.

Phua said the stable outlook reflected S&P's expectation that the state will continue its strong budgetary performance and maintain its robust liquidity position over the next two to three years.

'Downward pressure on the ratings could occur if Sarawak state breaches the 270% tax-supported debt to operating revenue benchmark, if the state ceases to be in a net cash position, or if there is a material increase in leverage associated with major state-owned-enterprises.

'On the other hand, upside potential to the ratings on Sarawak is limited by Malaysia's sovereign creditworthiness,' said Phua.

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