Aras Sejagat Sdn Bhd - 2009

MARC has affirmed its AA+ID(bg) rating on Aras Sejagat Sdn Bhd’s (Aras Sejagat) Bank Guaranteed Sukuk Ijarah (Sukuk Ijarah) issuance of up to RM500 million in nominal value. The rating reflects the strength of the unconditional and irrevocable bank guarantee of up to RM420 million by Kuwait Finance House (Malaysia) Berhad (KFHMB). Any subsequent drawdown would require a guarantor(s) with a minimum long-term credit rating of AA+ or its equivalent. MARC has recently affirmed KFHMB’s long-term financial institution rating at AA+ with a developing outlook. Accordingly, the outlook on Aras Sejagat’s rating has also been revised to developing from stable to mirror the outlook of the facility’s guarantor.

Aras Sejagat is a wholly-owned subsidiary of AirAsia Berhad (AirAsia), incorporated for the sole purpose of raising the Sukuk Ijarah. With AirAsia’s operations being the source of the Ijarah payments, the underlying repayment ability of the Sukuk is driven by the credit profile of AirAsia. AirAsia’s credit profile is supported by its strong market position, robust load factors, high operating profit margins and good cash-generating ability. While AirAsia’s ability to make the Ijarah payments remains strong, MARC has noted a weakening in its credit metrics in light of its recurring negative free cash flows, high debt leverage and significantly reduced level of available liquidity which has exerted downward pressure on its credit profile. Mitigating MARC’s concerns to a certain extent is the recent private placement of shares totalling RM505.4 million and deferment of its aircraft deliveries which will ease its immediate capital requirements. Going forward, MARC expects AirAsia’s exposure to volatile jet fuel prices and its heavy capital commitments over the medium term to act as key constraints on its credit metrics.

AirAsia Group is the leading low-cost carrier (LCC) in Southeast Asia with the most extensive route network, allowing it to tap into underserved, and at times even uncontested, markets. The group has increased its network to 129 routes as at September 30, 2009 from 26 routes in 2004. In spite of AirAsia’s rapid growth as measured by the increase in available seat kilometres (ASK) by 18.0% to 16,176 million in 9MFY2009 (9MFY2008: 13,711 million), AirAsia has managed to keep its passenger load relatively constant between 70% to 75%, while most legacy airlines have reduced their capacity and experienced sharp drops in passenger load.

Like all airlines, AirAsia is heavily exposed to increases in jet fuel prices which constituted 31% of the group's restated consolidated revenue in 9MFY2009 (FY2008: 55%). AirAsia, which currently hedges its future jet fuel requirements through short-term jet fuel fixed swaps, actively manages its jet fuel price risk. To take advantage of falling fuel prices, the group reduced its fuel hedging contracts from 46 million barrels as at December 31, 2007 to 1.59 million barrels as at September 30, 2009. Although the unwinding has resulted in a sizeable loss and material cash outflow in FY2008, the scale-back of hedging activities has enabled AirAsia to benefit from the low fuel cost in the first three quarters of FY2009. However, this strategy comes with the risk of not being able to deflect higher fuel costs caused by a surge in jet fuel prices. AirAsia’s management states that its increasing ancillary income provides an important offset to its increased exposure to jet fuel price risk. In 9MFY2009, ancillary services accounted for 13.8% of the group’s restated revenue (FY2008: 8.3%).

AirAsia reported a pre-tax loss of RM869.2 million for the financial year ended December 31, 2008. The weaker performance was reflective of losses incurred on the unwinding of its fuel hedges and interest rate swaps amounting to RM678.5 million. However, OPBITDA adjusted for operating leases remained strong at RM917.8 million (six months ended December 31, 2007: RM400.2 million). AirAsia’s results for the nine-month period ending September 30, 2009 have shown a strong recovery partly due to lower fuel costs, with RM398.5 million in profit before tax (9MFY2008: loss before tax of RM441.1 million). However, its aggressive fleet expansion programme continues to impede the generation of free cash flow. While AirAsia has been very successful in stimulating leisure travel demand and maintaining a respectable load factor to date, the continuing rapid expansion of its fleet and the sensitivity of its operating results to jet fuel prices creates uncertainty and impedes its generation of free cash flow.

While the group’s rapid growth and fleet size has been funded mostly through debt, AirAsia’s private placement exercise on September 15, 2009 raised RM505.4 million, which has reduced its debt-to-equity ratio to 2.79 times as at September 30, 2009, from 3.57 times in the previous quarter. Borrowings, however, have increased by RM524.3 million to RM7.22 billion in September 30, 2009 from RM6.69 billion as at end-FY2008. Based on its rescheduled aircraft deliveries, the group is expected to incur approximately RM2.4 billion per annum in capital expenditure for the next two years and RM3.6 billion per annum thereafter until 2014 on fleet expansion. AirAsia has secured committed aircraft financing for its deliveries up to December 2010. Taking into consideration AirAsia’s aircraft commitments, MARC believes that the degree to which AirAsia is able to counter its negative free cash flow trends will continue to have a large bearing on its near- to intermediate-term credit profile.

KFHMB, the sole guarantor bank at present, is a wholly-owned subsidiary of Kuwait Finance House KSC (KFH). The rating of KFHMB reflects KFHMB’s strategic importance to KFH, the second-largest Islamic bank in the world. KFH is 49%-owned by the Kuwaiti government and is the country’s second largest bank. KFHMB benefits from an explicit intent of support in respect of liquidity from its parent.

Major Rating Factors

Strengths

• Strong market position, largest low-cost carrier airline in Asia with a large route network;
• Robust load factors; and
• High operating profit margins and strong cash-generating ability;

Challenges/Risks

• Exposure to volatile jet-fuel prices;
• Highly debt leveraged;
• Significantly reduced liquidity; and
• Heavy capital commitments over the medium term.