12/02/2016 (Bernama) - Malaysian Rating Corporation Bhd (MARC) has assigned a preliminary rating of AAIS to Sime Darby Bhd's Perpetual Subordinated Sukuk Programme of up to RM3 billion.

It also affirmed the ratings of MARC-1ID/AAAID on the existing RM4.5 billion Islamic Medium-Term Note (IMTN) Programme and RM500 million Islamic Commercial Paper/Islamic Medium-Term Note (ICP/IMTN) Programme with a combined limit of RM4.5 billion.

In a statement, the rating agency said the company's rating outlook for the Perpetual Sukuk was negative, consistent with the revised outlook on the ICP/IMTN to negative from stable.

"The two-notch rating differential between the Perpetual Sukuk and IMTN is in line with MARC's notching principles on hybrid securities.

"The negative outlook revision factors in the slower-than-expected pace of measures initiated thus far to address the substantial increase in group borrowings following the debt-funded acquisition of New Britain Palm Oil Limited for RM6 billion in March 2015," it said in a statement.

MARC said some of the group's earlier plans to pare down its debt have been postponed owing to weak market conditions.

Additionally, the group's key business segments have continued to face a tough operating environment, leading to weaker earnings and cash flow generation that have put pressure on its credit metrics.

"These factors notwithstanding, the affirmed ratings reflect Sime Darby's geographical diversity of and significant market position in the oil palm plantation, property, motors and industrial segments.

"The group's strong financial flexibility which also stems from its status as a government-linked corporation supports the rating affirmation," it said.

MARC noted that Sime Darby's plan to issue the Perpetual Sukuk is a major first step to improve the group's liquidity profile; initial proceeds from the issuance would be utilised to meet upcoming financial obligations.

As the Perpetual Sukuk receives 50 per cent equity credit in line with MARC's approach in evaluating hybrid securities, group debt-to-equity would improve to 0.53 times from 0.60 times, assuming the full drawdown of RM3.0 billion is utilised for debt repayment.

MARC also said the group was working on other initiatives to strengthen its balance sheet, including equity placements, monetising non-core assets and divestments.

Nonetheless, MARC remained concerned on the implementation timeline given the prevailing challenging conditions, it added.