MARC has revised its outlook on its AA+IS(bg) rating on Aras Sejagat Sdn Bhd’s (Aras Sejagat) RM500 million Bank Guaranteed Sukuk Ijarah (Sukuk Ijarah) Programme to stable from negative. At the same time, MARC affirmed the AA+IS(bg) rating on the Sukuk Ijarah. The rating action on Aras Sejagat’s sukuk solely reflects the outlook change on MARC’s financial institution rating of guarantor, Kuwait Finance House (Malaysia) Berhad (KFHMB) to stable from negative and the agency’s affirmation of the aforementioned rating. KFHMB’s rating is notched down from that of parent, Kuwait Finance House K.S.C. (KFH) on the expectation of ongoing support for the strategic subsidiary from the parent. The outlook on KFHMB’s financial institution rating is aligned to that of its parent, which MARC had revised on account of signs of stabilisation in KFH’s asset quality. MARC had affirmed both the financial institution ratings of subsidiary and parent on November 18, 2011, full details of which are provided in the rating announcement on KFHMB of the same date.

Aras Sejagat, a single purpose company, is a wholly-owned subsidiary of AirAsia Berhad (AirAsia) whose sole purpose is the raising of finance under the Sukuk Ijarah programme. The issuer’s standalone creditworthiness derives from the financial profile of AirAsia group, the lessee in the underlying Ijarah transaction. As of September 30, 2011, the group is the largest low-cost carrier (LCC) in Asia Pacific with a fleet of 96 jet-engine aircrafts serving 130 routes in 18 countries with affiliate LCC airline operating companies in Thailand and Indonesia and a long-haul LCC through AirAsia X. AirAsia’s focus on maintaining a high load factor through new routes and destination and low costs by operating a young fleet has helped the group maintain a track record of strong operating performance which is evident from its relatively steady operating profit margin and increased cash flow generating capacity. These credit strengths are moderated by the sensitivity of AirAsia’s financial performance to increases in aircraft fuel costs, increased competition from other carriers, and reduced passenger traffic as a consequence of a weaker economic environment. The prospect of a potential increase in debt levels in line with further expansion of its fleet and its already significant debt leverage are other constraining factors with regard to the group’s creditworthiness, along with the refinancing risk that is posed by the bullet redemption of the entire outstanding RM420 million sukuk in 2013.

For the financial year ended December 31, 2010 (FY2010), AirAsia reported revenue growth of 26% to RM3,948.1 million (FY2009: RM3,132.9 million) and profit before tax growth of 77% to RM1,098.9 million (FY2009: RM622.3 million). For the year, the group managed to report a slight increase in yield as the increase in revenue passenger kilometre (RPK) offset the rise in cost which was attributable to higher jet-fuel prices which remained sticky at 42% of operating cost. For the nine months to September 30, 2011 (9MFY2011), revenue grew 15% to RM3,201.1 million (9MFY2010: RM2,783.7 million) while profit before tax came in lower at RM456.4 million (9MFY2010: RM710.7 million) as fuel costs as a percentage of operating expenses increased to 50% at RM421.2 million compared to RM290.4 million in the corresponding period last year. As the price outlook for jet-fuel continues to be high, the group has hedged up to 30% of its fuel requirements for 4QFY2011 and, at the same time pushed for increasing contribution from ancillary income, whose quantum per passenger increased to RM50 for 1HFY2011 (FY2010: RM44 and FY2009: RM29). Operating cash flow for FY2010 improved to RM1,941.2 million (FY2009: RM1,251.4 million) with the group reporting positive free cash flow of RM38.4 million for the year and RM1,033.3 million for 9MFY2011. The improved free cash flow was mainly attributable to the group deferring a significant portion of aircraft deliveries to 2015 onwards. The ratio of AirAsia’s cash and cash equivalents to its current liabilities stood at 0.80 times as at end-December 2010 and more recently, as at end-September 2011, where the ratio nearly doubled from FY2009 (0.42x) reflecting partially prudent liquidity management practice of retaining at least two months operating expenses in readily available cash. Financial leverage as measured by debt-to-equity (DE) ratio improved to 1.91x as at end-9MFY2011 from 2.16x in FY2010 and a high of 4.11x in FY2008, however, MARC notes that ratio would be sensitive to the pace of fleet expansion, going forward, particularly in light of its significant pending aircraft deliveries.

Although the exact form of the recent collaboration agreement with Malaysia Airlines remains unclear, MARC opines that easing competition in the rather small domestic LCC market augurs well for AirAsia as it helps protect and enhance profit margins by keeping the load factor intact while driving down costs through sharing of common resources and infrastructure.

Noteholders are insulated from the downside risks in relation to AirAsia’s credit profile by virtue of the guarantee provided by KFHMB. Any changes in the supported rating or rating outlook will be primarily driven by changes in KFHMB’s credit rating/outlook.

Contacts:
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.