RAM Ratings has reaffirmed the respective AA1/Stable ratings of YTL Power International Berhad's (YTL Power or the Group) RM5 bil MTN Programme (2011/2036) and RM2.5 bil Sukuk Murabahah Facility (2017/2027). The reaffirmation of the ratings is premised on the continued ability of YTL Power's operating entities to pay dividends to service its company-level debts. Despite an expected decline in the dividend-paying capacity of the Group's key dividend contributor, Wessex Water Services Limited (WWSL), YTL Power's debt-servicing indicators remain within our rating threshold, supported by the Group's superior liquidity and robust financial flexibility.  

The ratings reflect YTL Power's strong business profile, backed by its geographically diversified revenue base. WWSL's continued operating excellence has reinforced the Group's position as one of the best-performing companies in the water and sewerage sector in the UK. The commendable operating track records of the Group's other regulated assets  PT Jawa Power and ElectraNet Pty Ltd  are anticipated to continue contributing positively to its financial performance.

RAM places greater emphasis on YTL Power's company-level credit metrics, given that the bulk of the debts of the Group's operating entities is concession-related, ring-fenced and have no recourse to the holding company. The ratings also factor in the substantial unencumbered cash balances of YTL Power's intermediary companies, which can be readily repatriated as and when needed to service its company-level debts. In this respect, YTL Power boasts a superior liquidity position. As at end-June 2018, its RM2.64 billion of company-level short-term debts were amply covered by the Group's RM9.68 billion of unencumbered cash. YTL Power also has a well-spread-out maturity profile for its company-level debts.

The ratings are further supported by YTL Power's robust financial flexibility, as reflected by the quality and increasing equity values of its key regulsets. The management has represented that it is able to generate cashflow from strategic divestments of small stakes in its operating entities, e.g. the partial divestment of its stake in PT Jawa Power in 2011. ''Regulated assets such as WWSL and ElectraNet increase in value over time, compared to only time-based concessions, the value of which diminish as the concession terms run down,'' explains Davinder Kaur Gill, RAM's co-head of Infrastructure & Utilities Ratings.  

YTL Power's superior liquidity and robust financial flexibility are balanced by its weaker company-level operating cashflow (OCF) net debt coverage ratio over the next five years. This is attributable to the expected decline in the dividend-paying capacity of its operating entities, as well as a decrease in the Group's unencumbered cash reserves, which will be channelled to fund the equity investment in its Indonesian power project. YTL Power's OCF net debt coverage ratio is envisaged to decline to 0.45 times in FY Jun 2019  (FY Jun 2018: 0.77 times), and subsequently hover around 0.21-0.29 times over the next four years. ''The projected ratio is very close to the rating threshold of 0.20 times. As such, the rating will experience downward pressure from any major acquisition or investment in new projects if these are not accompanied by an immediate uplift in earnings and dividend-paying capacity,'' highlights Davinder.  

The ratings are, however, moderated by the multiple headwinds that may continue pressuring the Group's earnings. WWSL will face earnings pressure following industry-wide regulatory tightening effective April 2020. Despite this, YTL Power's company-level net debt coverage ratio is still expected to stay within the rating threshold. Moreover, excess generating capacity has been plaguing the Singaporean power market, causing YTL PowerSeraya Pte Ltd to incur a pre-tax loss in 1H FY Jun 2019. Considering the lower vesting contract level and intensified competition in the wholesalelretail markets of the Singaporean power sector, we do not foresee a turnaround in earnings in the absence of significant market consolidation.

The contract for the 1BestariNet project undertaken by YTL Communications Sdn Bhd (YTL Comms) is due for renewal on 30 June 2019. As the Government is likely to call for a fresh tender after that, any non-renewal of the project would deepen YTL Comms' losses. The ratings will be reassessed if financial support is required from YTL Power that causes its OCF net debt coverage ratio to fall below our rating threshold on a sustained basis. 

The credit profiles of YTL Power and its parent, YTL Corporation Berhad (YTL Corp), are considered very closely linked. Therefore, any deterioration in YTL Corp's credit profile would have a negative impact on YTL Power's (and vice versa).


Analytical contact
Chin Wynn, CFA
(603) 7628 1170
chinwynn@ram.com.my

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



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 fts publications.

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Copyright 2019 by RAM Rating Services Berhad

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