Moody’s affirms Axiata Group’s Baa2 rating with stable outlook

Moody's Investors Service – the bond credit rating business of Moody's Corporation – has affirmed its Baa2 issuer rating for Malaysian multinational telecommunications conglomerate Axiata Group Berhad, adding that the rating outlook remains stable.

On Tuesday, Moody's also affirmed the provisional (P)Baa2 senior unsecured ratings on the Sukuk issuance programme established by Axiata SPV2 Berhad, and the euro medium-term note (EMTN) programme established by Axiata SPV5 (Labuan) Ltd.

This rating was affirmed on all backed senior unsecured notes issued by the entities too, which are wholly owned subsidiaries of Axiata. Axiata Group Berhad holds the controlling stake of 61.82% in Robi Axiata Ltd – the second largest telecom service provider in Bangladesh.

This is the ninth highest rating in Moody's Long-term Corporate Obligation Rating, and obligations rated Baa2 are subject to moderate credit risk. They are considered medium grade and as such may possess certain speculative characteristics.

On the matter, Moody's said, "The rating affirmation reflects our view that Axiata's recently announced merger of its Malaysian operations with Norwegian telecom company, Telenor ASA (A3 stable) is broadly neutral for Axiata's credit profile."

Meanwhile, a Moody's Vice President and Senior Analyst Nidhi Dhruv said, "The merger, if consummated, will create a new cellular leader in Malaysia – effectively doubling Celcom Axiata Berhad (Celcom)'s size, coverage in market operations and improving 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 added that at the same time, deconsolidation of Celcom will reduce Axiata's adjusted leverage to 1.9x-2.0x post-merger, as compared with our previous expectation of up to 2.2x without the merger.

Ratings Rationale

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's 49%-owned but consolidated company, Digi.Com Berhad.

The merger, when successfully completed, will create the largest telecommunications company in Malaysia, Celcom Digi Berhad. It will be listed in Malaysia, and Axiata and Telenor will each own 33.1% of it, according to Moody's.

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.

Post-merger, Axiata would lose access to Celcom's MYR1.6 billion of cash [Malaysian ringgit] and cash equivalents as of March 2021.

Moody's views cash as fungible between Celcom and Axiata. However, Axiata will receive cash of MYR4.4 billion as part of the merger, which somewhat offsets the loss of Celcom cash and will bolster liquidity for the company.

Axiata will receive MYR1.99 billion ($480 million) as part consideration upon closing of the transaction in Q2 2022, of which MYR890 million ($215 million) will be used to pay down debt.

Within six months from the close of the merger, Axiata will also receive MYR2.4 billion ($575 million) 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.

Providing more details, Senior Analyst Nidhi Dhruv said, "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 Berhad; however the ratings affirmation assumes that these dividend flows will be reasonably maintained in order to preserve Axiata's cash flow."

Axiata and Telenor will maximize dividend payouts from Celcom Digi Berhad, subject to free cash flows and leverage considerations at the merged company.

Based on this, Moody's expects dividends from Celcom Digi Berhad 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.

Outlook

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.

Moody's could upgrade the ratings if Axiata's fundamental credit profile continues to strengthen, with consolidated adjusted debt/EBITDA below 2.0x and retained cash flow/debt above 35% on a sustained basis.

However, it could also downgrade the ratings if competition intensifies further in any of Axiata's key markets, such that the company's key subsidiaries report material contractions in margins or borrow aggressively to fund capital spending, resulting in Axiata's consolidated adjusted debt/EBITDA rising above 2.5x.

More aggressive shareholder returns, such that retained cash flow/debt falls below 25% on a sustained basis, would also be negative for the ratings, as would an unexpected rise in regulatory risk in any of the markets in which Axiata operates.

The ratings would also be under pressure if dividends from Celcom Digi Berhad are insufficient to broadly offset loss of dividends from Celcom, or if Axiata extends support to debt of the merged company through financial guarantees.

Axiata Group Berhad is one of Asia's largest regional cellular telecommunications providers with approximately 150 million subscribers across 11 countries.

The company's key mobile operating subsidiaries include Celcom in Malaysia (wholly owned), XL Axiata in Indonesia (66.5% stake), Robi Axiata Limited in Bangladesh (Robi, 61.8%), Dialog Axiata PLC in Sri Lanka (Dialog, 83.0%), Smart Axiata Company Limited in Cambodia (Smart, 72.5%), and Ncell Axiata Ltd in Nepal (Ncell, 80.0%).

Axiata also holds a 63% stake in edotco Group Sdn Bhd, its regional tower subsidiary that owns a portfolio of over 22,800 towers in South and Southeast Asia.

Axiata demerged from Telekom Malaysia Berhad (A3 stable) in April 2008. As of 31 March 2021, the company was approximately 72% directly and indirectly owned by entities related to the Government of Malaysia, including a 36% stake held by Khazanah Nasional Berhad.