DRB-Hicom Bhd’s Islamic bonds rating changed to negative

The outlook recognises the potential weakening of DRB-Hicom’s near-to-intermediate term financial profile, caused by its debt-funded acquisition of Proton Holdings Bhd.

The rating agency said, “A key rating issue for DRB-Hicom in the context of the Proton acquisition is the more challenging debt maturity profile that would result from the acquisition-related interim financing decisions and the execution risk associated with plans to deleverage post-acquisition.”

DRB-Hicom is acquiring Khazanah Nasional Bhd’s 42.74% stake in Proton Holdings Bhd for a cash consideration of RM1.29 billion. The total purchase price of Proton has been estimated at RM3.02 billion which includes the earlier purchase of 7.27% equity in the open market and the cost of the remaining 49.99% which will be acquired via mandatory general offer (MGO).

DRB-Hicom is seeking approval from its sukuk holders to revise the proposed utilisation of the proceeds from the sukuk issued under the IMTN programme. Part of the proceeds will be used to partly fund the Proton acquisition instead of using the pay-down of its bridging loan for DRB-Hicom’s earlier acquisition of Pos Malaysia Bhd and other growth-related investments.

The repayment of the RM622.8 million bridging loan is to be extended by a year and DRB-Hicom will incur additional short-to-medium term debt to finance the MGO. According to MARC, the heavy concentration of debt maturities in financial year 2014/2015 as a result of the financing decision will diminish DRB-Hicom’s financial flexibility.

It is said that DRB-Hicom’s debt-to-equity ratio is expected to increase to 0.64 times following the completion of the transaction.

MARC said in a statement, “While MARC understands that the holding company plans to place its financial profile on a more sustainable footing by undertaking asset disposals, in particular the divestment of a 30% in Bank Muamalat Bhd and insurer Uni Asia Capital Sdn Bhd, execution risks are noted given the general uncertainty around the timing of the targeted asset disposals.

MARC is also concerned that Proton’s operating performance could cause a hold back on the group’s overall profitability. However, it expects to resolve the negative outlook within the next six months after the acquisition has been finalised.