Singapore, June 21, 2019 -- Moody's Investors Service has downgraded to A2 from A1 the domestic issuer
and foreign currency senior unsecured ratings of Petroliam Nasional Berhad
(PETRONAS), following Moody's publication of its updated cross-sector
methodology "Assessing the Impact of Sovereign Credit Quality on
Other Ratings" published on 20 June 2019.
At the same time, Moody's has downgraded: (1) to a2 from a1
the baseline credit assessment (BCA) of PETRONAS; (2) to A2 from
A1 the rating on the senior unsecured notes issued by PETRONAS Capital
Limited and guaranteed by PETRONAS; (3) to (P)A2 from (P)A1 the senior
unsecured rating on the $15 billion medium-term note (MTN)
program set up by PETRONAS Capital Limited and guaranteed by PETRONAS;
and (4) to A2 from A1 the senior unsecured rating on the sukuk issued
through PETRONAS Global Sukuk Ltd.
Moody's has also changed the ratings outlook to stable from negative.
RATINGS RATIONALE
"Even though PETRONAS' credit metrics remain strong for its
ratings, the close credit linkages between the government of Malaysia
(A3 stable) and PETRONAS cannot support a rating for PETRONAS, under
the revised methodology, that is two notches higher than the Malaysian
sovereign," says Vikas Halan, a Moody's Senior Vice
President. The company's ties to the sovereign create potential
for government interference that may have a negative impact on the company's
business profile or cash flow.
The close credit linkages between PETRONAS and the Malaysian government
are evidenced by (1) the government's 100% ownership of PETRONAS;
(2) the fact that about two-thirds of the company's assets,
production and reserves are based in Malaysia; and (3) the government's
dependence on the petroleum sector for nearly 20% of its revenue
(excluding special dividends) on an ongoing basis.
The close linkages were also evident in November 2018, when the
Malaysian government announced that PETRONAS will pay one-off special
dividends of MYR30 billion to the government to fund certain tax refunds.
Although PETRONAS has demonstrated strong fundamentals and continues to
maintain a liquidity position that can support the dividend payments,
a further request, especially if there is an increase in government's
funding needs, cannot be ruled out.
PETRONAS' business and financial risk profiles could also be affected
by the potential changes to the Malaysian government policies on the oil
and gas sector. The ongoing review of the implementation of the
Malaysia Agreement of 1963 (MA63), could provide more rights to
the states of Sabah and Sarawak over their natural resources and oil and
gas reserves. Implementation of this will require changes in the
Petroleum Development Act of 1974 (PDA 1974). The impact and timing
of such changes for PETRONAS remain uncertain at this stage.
"However, PETRONAS' strong credit metrics, its
low dependence on the domestic economy -- with 70% of its
revenue generated through exports and overseas -- and its superior
access to the international capital markets, mean its ratings can
be maintained one notch above the sovereign rating," adds
Halan, who is also Moody's Lead Analyst for PETRONAS.
Based on Moody's oil price assumption of $50-$70
per barrel through 2020, it expects credit metrics of PETRONAS will
continue to be stronger than the level required to maintain its A2 ratings.
More specifically, over the next two to three years, Moody's
expects PETRONAS will be able to maintain a net cash position of MYR60-MYR65
billion, adjusted debt/ EBITDA of below 1.0x and total debt/total
capitalization in the range of 15%-20% against its
downgrade threshold of 30%-35%.
The A2 ratings reflect PETRONAS' standalone credit quality, as captured
in its a2 BCA.
The a2 BCA is supported by the company's (1) large-scale hydrocarbon
reserves; (2) strong financial metrics; (3) conservative financial
policies; and (4) solid liquidity profile.
At the same time, PETRONAS' BCA remains constrained by the geographic
concentration of its oil & gas reserves in Malaysia, and the
relatively small scale of its downstream operations, with the latter
resulting in an elevated exposure to the cyclical oil & gas industry.
Moody's assumes a very high likelihood of extraordinary support from and
dependence on the Government of Malaysia (A3 stable). However,
this assumption does not result in any ratings uplift, because the
sovereign rating is already positioned below PETRONAS' ratings.
Moody's support assessment reflects PETRONAS' importance as the country's
national oil company and its strategic role in the development of oil
& gas reserves in Malaysia, with both factors presenting strong
incentives for the government to provide support.
The outlook on the ratings is stable, in line with the stable outlook
on the government's A3 rating.
The stable outlook is also underpinned by the large cash balance of the
company that provides protection to its credit profile during periods
with heightened oil price volatility or when there is an increase in payment
to the government in form of dividends, royalty and taxes.
PETRONAS' BCA and ratings could face downward pressure if there are unexpected
changes to Malaysia's policy for the oil & gas sector that result
in a significant decline in the company's reserves and oil & gas entitlement.
A large debt-funded acquisition could also pressure the ratings.
Credit metrics indicative of downward pressure on the ratings include
retained cash flow/net debt below 40%-45%,
adjusted debt/capitalization above 35%-40% and EBIT/interest
expense below 10x-11x.
A downgrade of the sovereign rating would also result in a downgrade of
the company's ratings.
An upgrade of the ratings to A1 will require an upgrade of the Malaysian
government's rating to A2. In addition, an upgrade
will require PETRONAS to maintain a credit profile that continues to support
higher ratings. Credit metrics supportive of an A1 rating level
include retained cash flow/net debt above 45%-50%,
adjusted debt/capitalization below 30%-35% and EBIT/interest
expense above 12x-13x.
The methodologies used in these ratings were Global Integrated Oil &
Gas Industry published in October 2016 and Government-Related Issuers
published in June 2018. Please see the Rating Methodologies page
on www.moodys.com for a copy of these methodologies.
Petroliam Nasional Berhad (PETRONAS) is a 100% Malaysian government-owned
oil and gas company, with operations spanning upstream oil &
gas exploration and production, downstream oil refining, marketing
and distribution of petroleum products, as well as trading in oil,
petroleum and petrochemicals products.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt 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.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
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.
Vikas Halan
Senior Vice President
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
Laura Acres
MD - Corporate Finance
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
