KUALA LUMPUR (Sept 20): Axiata Group Bhd's credit profile is increasingly likely to weaken, according to S&P Global Ratings.

In a statement on Monday (Sept 19), the rating agency said the proposed merger between Celcom Axiata Bhd (Axiata's Malaysia unit) with Digi.Com Bhd is now a step closer to completion.

“In our view, this transaction will erode the earnings quality of Axiata.

“An acquisition-fuelled increase in leverage adds further pressure to Axiata's credit profile,” it said.

S&P Global said the ratings on Axiata (BBB+/Watch Neg/--) are on CreditWatch with negative implications to reflect a likely downgrade to "BBB" following the substantial completion of the Celcom-Digi merger.

The rating agency said it expects to resolve the CreditWatch status after the regulatory outcome of the proposed merger, which is likely to be known by the end of 2022.

“In resolving the CreditWatch, we will consider our expectations of Axiata's long-term financial risk appetite,” it said.

S&P Global said Axiata's leverage has risen following its series of acquisitions.

It said that over the past 12 months, the company has undertaken close to RM9 billion worth of acquisitions.

It said this includes the purchase of tower assets of Philippine-based PLDT Inc, Malaysia-based Touch Mindscape Sdn Bhd and Indonesia-based PT Link Net Tbk (including the ongoing mandatory tender offer).

S&P Global said this rising debt comes amid a likely decline in earnings quality.

“In our opinion, the Celcom-Digi merger will weaken Axiata's earnings quality.

“This will be mainly due to the loss of direct control over cash flows from wholly-owned Celcom, which has contributed about a quarter of Axiata's Ebitda (earnings before interest, taxes, depreciation and amortisation) .

“In our view, post the transaction, Axiata's adjusted Ebitda, which will include dividends from the merged entity Celcom Digi Bhd, will become more volatile,” it said.

S&P Global explained that that is because dividends are likely to fluctuate with Celcom Digi's other cash flow needs, such as for capital expenditure.

It said stronger reliance on cash flows from emerging markets after the Celcom-Digi merger could also expose Axiata's earnings to greater risk. While such markets, including Sri Lanka, Bangladesh and Nepal, have better growth potential, they are subject to more regulatory and volatility risk than Malaysia.

It said for example, the economic crisis in Sri Lanka has resulted in an approximately 40% depreciation of the Sri Lankan rupee against the Malaysian ringgit since early March 2022.

This will hurt the earnings contribution from Axiata's Sri Lankan operations, it said.

“Axiata's weaker earnings quality will translate into a commensurately lower debt tolerance at the 'BBB+' rating level.

“We believe the company will breach this tighter leverage threshold.

“By our estimate, Axiata's debt-to-Ebitda ratio will rise to 2.7-2.8 times in 2023, from about 2.2 times in 2021. This assumes that all the acquisitions are complete, and the Celcom-Digi merger proceeds,” it said.