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Rating Action:

Moody's affirms Axiata's Baa2 ratings; outlook stable

29 Jun 2021

Singapore, June 29, 2021 -- Moody's Investors Service has affirmed Axiata Group Berhad's (Axiata) Baa2 issuer rating.

Moody's has 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) Limited, as well as the Baa2 rating on all backed senior unsecured notes issued by the entities, which are wholly owned subsidiaries of Axiata.

The rating outlook remains stable.

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.

"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 improve 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," says Nidhi Dhruv, a Moody's Vice President and Senior Analyst.

"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," adds Dhruv, also Moody's Lead Analyst for Axiata.

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 (Digi).

The merger, when successfully completed, will create the largest telecommunications company in Malaysia, Celcom Digi Berhad. Celcom Digi Berhad will be listed in Malaysia, and Axiata and Telenor will each own 33.1% of it. 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 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 close of the transaction in Q2 2022, of which MYR890 million ($215 million) will be used to pay down debt. Within six months from 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.

"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," adds Dhruv.

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.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

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.

Moody's could 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.

Given the ratings incorporate a one-notch uplift to reflect majority ownership by government-related entities, any reduction in these shareholdings or any perceived scale back in operational involvement could result in a reassessment of the support level incorporated in the ratings.

The methodologies used in these ratings were Telecommunications Service Providers published in January 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1055812, and Government-Related Issuers Methodology published in February 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1186207. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

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 (1) Celcom in Malaysia (wholly owned), (2) XL Axiata in Indonesia (66.5% stake), (3) Robi Axiata Limited in Bangladesh (Robi, 61.8%), (4) Dialog Axiata PLC in Sri Lanka (Dialog, 83.0%), (5) Smart Axiata Company Limited in Cambodia (Smart, 72.5%), and (6) Ncell Axiata Limited 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.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nidhi Dhruv, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Ian Lewis
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

Releasing Office:
Moody's Investors Service Singapore Pte. Ltd.
50 Raffles Place #23-06
Singapore Land Tower
Singapore 48623
Singapore
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077

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