Rantau Abang Rationale 2009

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations, transfer and convertibility risks, repatriation risk, currency risk or any other risk apart from credit risk.

CREDIT RATING RATIONALE PP8713/10/2007

STRUCTURED FINANCE RATINGS

NOVEMBER 2009

RANTAU ABANG CAPITAL BERHAD

– Rating Review

� Summary

RAM Ratings has reaffirmed the long- and short- term ratings of Rantau Abang

Capital Berhad’s (“RACB” or “the Company”) RM3 billion Islamic Commercial

Papers/Medium-Term Notes Programme (“ICP/IMTN”) at AAA and P1

respectively. At the same time, the AAA rating of the Company’s RM7 billion

Islamic Medium-Term Notes Programme (“IMTN”) has also been reaffirmed. Both

long-term ratings have a stable outlook. The debt instruments will be collectively

known as “the Sukuk Musharakah” or “the Islamic securities”.

RACB, a wholly owned subsidiary of Khazanah Nasional Berhad (“Khazanah” or

“the Obligor”) had been set up to undertake this RM10.0 billion Islamic ICP/IMTN

and IMTN Programme. Under the transaction, a Musharakah partnership had

been established between Khazanah and RACB (collectively known as “the

Musharakah Partners”), under which the Company acts as the wakeel (“Trustee”)

for the Sukuk investors vis-à-vis investing in a portfolio consisting of Shariah-

approved shares and assets owned by Khazanah (“the Portfolio”). Throughout

the tenures of the Islamic securities, the investment assets may be taken out

from the Portfolio through a deferred-payment sale, or be exchanged with shares

or assets of at least equivalent value endorsed by CIMB Bank Berhad’s Shariah

Committee. Hence, the value of the portfolio (at cost) will always be at least

equivalent to the nominal value of the outstanding Sukuk.

Under the transaction, the capital returns and periodic profit payments from the

Portfolio will ultimately be serviced by Khazanah, by virtue of the Purchase

Undertaking; the Obligor will purchase the specific portfolio units from RACB at a

pre-agreed price (“Exercise Price”) upon maturity or a Dissolution Event. Under

the Musharakah venture, the Musharakah Partners are entitled to the income

derived from the portfolio that is attributable to the respective portfolio units held.

The Exercise Price for Sukuk Musharakah that yield no profit will be equivalent to

the face value of the Sukuk Musharakah. In the case of the IMTN, the final

Exercise Price payable by the Obligor upon a Dissolution Event or Event of

Default, will be adjusted after taking into account the date of declaration of such

Analysts: Ang Swee Ee (603) 7628 1713 [email protected] Elsie Tham (603) 7628 1032 [email protected] Principal Activity: To undertake the RM10 billion Islamic CP/IMTN and Islamic IMTN Programme Instruments: i) RM3 billion Islamic

Commercial Papers/Medium-Term Notes Programme

ii) RM7 billion Islamic Medium-Term Notes Programme

Islamic Contract: Musharakah Ratings: (i) AAA/P1 [Reaffirmed] (ii) AAA [Reaffirmed] Rating Outlook: (i) Stable (ii) Stable Last Rating Action: 24 December 2008 Profit Margins: (i) and (ii) Determined at issuance

Maturity Dates: (i) To be determined at

issuance (ii) Varies between 15

March 2011 and 25 September 2015

Rantau Abang Capital Berhad 2

an event. As such, the ratings of the Islamic securities reflect the credit strength

of Khazanah in its capacity as the Purchase Undertaking Obligor.

Khazanah’s credit strength is supported by the following:

• Diversified portfolio with key investments in strategic industries

Khazanah’s strength lies in the high degree of diversity in its investment

portfolio, with a Realisable Asset Value (“RAV”) of RM69.47 billion as at

the end of FYE 31 December 2008 (“FY Dec 2008”); this is fortified by its

dominant stakes in strategic assets in Malaysia’s key economic segments.

Despite the lacklustre economy in 2008, dividend income from Khazanah’s

subsidiaries and associates doubled to RM4.89 billion (FY Dec 2007:

RM2.33 billion), partly due to government-linked companies’ (“GLCs”)

better ability to weather the downturn as a result of efforts under the 10-

year GLC Transformation (“GLCT”) programme adopted in 2004.

• Implicit and implied support from Government

As the investing arm of the Malaysian Government, Khazanah has

received various forms of government support because of its relevance to

the national mandate of developing the domestic economy, further

substantiated by the Company’s stakes in key sectors. The Government’s

second stimulus package (announced in March 2009) had led to a planned

RM10 billion injection of funds into Khazanah for the latter to invest in key

sectors of the domestic economy; this demonstrates the Company’s

importance as one of the Government’s key growth engines for identified

segments.

• Substantial financial flexibility

Khazanah has a strong degree of financial flexibility as it is able to leverage

on its strong asset base and/or pledge collateral to tap capital markets for

refinancing and additional funding needs. Being at the helm of the

Government’s investment armada, Khazanah also has very good access to

capital funding; the Company can source cheaper financing given that it

has been allowed to issue Government-guaranteed papers, if needed.

The positives above are, however, moderated by the following factors:

• Short-to-medium-term focus on domestic and disadvantaged sectors

may detract from realising superior returns

With the slowdown of the Malaysian economy in 2008/2009, Khazanah’s

immediate focus is in catalytic and transformative sectors on the domestic

front, whilst remaining cautious on its international investments. In FY Dec

2008, Khazanah invested approximately RM3.2 billion in existing and new

foreign ventures against only a single RM87.5 million investment in the first

7 months of 2009. The Company’s short-to-medium-term focus will be on

Lead Arranger: CIMB Investment Bank Berhad Trustee: PB Trustee Services Berhad


investing in segments that will have a “multiplier effect” on the domestic

Malaysian economy, with the intention of creating job opportunities,

reducing economic disparity and eliminating hardcore poverty among

others. While beneficial from a social and economic perspective to the

average person on the street, the returns from such ventures are only likely

to be realised over the longer term.

• Highly leveraged balance sheet

Khazanah’s balance sheet had a reasonably high level of borrowings with

a RM33.14 billion debt burden1 as at end-FY Dec 2008 (end-FY Dec 2007:

RM23.65 billion), including borrowings financed via special-purpose

vehicles, of which the Company is the ultimate obligor. Khazanah’s gearing

and net debt-to-asset ratios had augmented to 1.83 and 0.61 times at end-

FY Dec 2008 (end-FY Dec 2007: 1.40 and 0.56 times). At the same time,

the Company’s operating profit before depreciation interest and tax

(“OPBDIT”) debt coverage ratio had thinned to 0.17 times (end-FY Dec

2007: 0.29 times) – largely due to a doubling of the amounts due to related

companies vis-à-vis its financing vehicles. Nonetheless, Khazanah’s hefty

debt obligations are balanced by the stable cashflow from its diversified

dividend receipts, along with its ability to monetise its highly liquid

investments if need be.

� Transaction Summary

Figure 1: Transaction overview

Under this transaction, a Musharakah partnership has been formed at the

portfolio level between the Musharakah Partners, i.e. Khazanah and RACB. A

1 Includes amounts owed to related companies

Purchase

Undertaking

Issues Sukuk Musharakah

Proceeds from Sukuk investors

100% Subsidiary

Khazanah

RACB (Wakeel)

Sukuk Musharakah

PB Trustee (Sukuk Trustee)

Sale Undertaking

Portfolio Trustee

Payment for purchase of portfolio units from Khazanah

Portfolio - Divided into portfolio

units

Specific

portfolio units

1 special

portfolio unit

Musharakah at the portfolio level

Musharakah at the Sukuk investors level


A Musharakah contract involves a partnership between various parties that

provide capital towards the financing of a business venture. In this instance,

RACB acts as the wakeel for the Sukuk investors vis-à-vis investing in the

respective portfolio units. The Musharakah Partners will contribute their

respective portions of capital to the venture; any profit derived from the venture

will be distributed based on a pre-agreed profit-sharing ratio. On the other hand,

losses will be shared according to each Musharakah Partner’s proportionate

holdings of the portfolio units, which represent the capital in the Musharakah

venture.

The investment portfolio will be represented by 1 special portfolio unit that is held

by Khazanah at all times, and specific portfolio units which will be sold to RACB

from time to time. Each portfolio unit will represent a proportionate undivided

interest in the Portfolio. The ratio of Khazanah’s and RACB’s holdings in the

portfolio units will represent their proportionate interests in the Musharakah at

portfolio level.

The Sukuk investors will, from time to time, subscribe to the Sukuk Musharakah

issued by RACB. In turn, the Company will use the proceeds to purchase specific

portfolio units, thereafter holding these in trust for the benefit of the Sukuk

investors. The Sukuk Musharakah will represent the Sukuk investors’ undivided

beneficial interests in the respective venture at the Sukuk investors’ level, to

purchase specific portfolio units through RACB. A new Musharakah contract at

the Sukuk investors’ level will be created for each Sukuk issuance. Each

Musharakah contract will be independent of the others, as the investors and the

proportions of their investments may differ.

Upon RACB’s purchase of the specific portfolio units, Khazanah will extend a

Purchase Undertaking to the Sukuk Trustee, to purchase the respective portfolio

units at the Exercise Price upon their respective maturity dates, or upon a

Dissolution Event for the relevant Sukuk Musharakah. The Exercise Price for

Sukuk Musharakah that yield no profit will be equivalent to the face value of the

Sukuk Musharakah. In the case of the IMTN, the Exercise Price payable by the

Obligor upon a Dissolution Event or Event of Default - as the case may be - will

be adjusted after taking into account the date of declaration of such an event.

The Exercise Price may be paid upon maturity, or at regular intervals as periodic

distributions (for profit-paying IMTN) in the form of partial payments of the

Exercise Price pursuant to each Purchase Undertaking. As a result of the

periodic distributions, the interests of the Sukuk investors in the Musharakah will

ultimately be reduced in proportion to the partial payments; Khazanah’s interests

in the Musharakah will increase by the same quantum.

Under the Musharakah venture, the Musharakah Partners will be entitled to

income derived from the Portfolio that is attributable to the respective portfolio

units held. From the outset of each Sukuk issuance, however, the Sukuk


investors will waive their rights to any income from the portfolio units that exceed

the returns included in the Exercise Price, for the benefit of Khazanah.

Concurrent with the Purchase Undertaking, the Sukuk Trustee will extend a Sale

Undertaking to Khazanah to sell the portfolio units, together with any accrued

income generated from the portfolio units from the date of their purchase, to the

latter upon maturity or a Dissolution Event. In relation to this, the Sukuk investors

will waive their rights to receive any accrued income; there will therefore be no

distribution of income to the respective portfolio units. The Sukuk investors’

returns will thus be limited to the Exercise Price.

Events of Default under the Purchase Undertaking include Khazanah’s failure to

settle the Exercise Price when due, as well as a change in its shareholding

structure. Meanwhile, a Dissolution Event includes an Event of Default under the

Purchase Undertaking and RACB ceasing to be a 100%-owned subsidiary of

Khazanah. A Dissolution Event will trigger the Purchase Undertaking, upon which

Khazanah will be obligated to purchase the specific portfolio units from RACB. In

this instance, however, the Exercise Price may be adjusted to take into account

the earlier-than-expected redemption. Upon the full settlement of Khazanah’s

obligations, the entire facility will be cancelled and the Musharakah venture will

be dissolved

Under the transaction, the periodic distributions and capital returns are ultimately

serviced by Khazanah, by virtue of the Purchase Undertaking to acquire the

specific portfolio units from RACB at a pre-agreed price upon maturity or a

Dissolution Event, as well as the Obligor’s commitment to top up the shortfall in

the periodic returns should the returns from the underlying portfolio be less than

expected.

Since the last review in December 2008, another RM1 billion was issued on 16

September 2009; this instrument is due to mature on 16 September 2010

bringing the total amount outstanding under the Programme to RM8 billion.

Table 1: Maturity dates of ICP and IMTN issued by RACB

Instrument Nominal value (RM million) Maturity dates

IMTN 1,000 16 September 2010

IMTN 2,200 15 March 2011

IMTN 2,000 15 March 2012

IMTN 1,500 14 August 2013

IMTN 1,300 25 September 2015

8,000


� Khazanah as Purchase Undertaking Obligor

The ratings of the Islamic securities reflect Khazanah’s credit strength vis-à-vis

the Purchase Undertaking; Khazanah is the ultimate obligor servicing the profit

and capital returns under this transaction. As such, RAM Ratings has reviewed

the credit strength of Khazanah in meeting the obligations due under the RM10

billion Islamic securities.

� Company Background

Khazanah was incorporated on 3 September 1993 under the Companies Act

1965, and commenced operations as the investment-holding arm of the

Government. Save for 1 share held by Pesuruhjaya Tanah Persekutuan (or the

Federal Land Commissioner), the entire equity of Khazanah is owned by MOF

Inc.

As the investment arm of the Government, Khazanah manages the former’s

commercial assets and invests in companies that are considered strategic to the

Government. Khazanah’s diversified portfolio of investee companies are involved

in various sectors such as utilities, financial institutions, transportation,

telecommunications, property and construction, healthcare, automotive,

manufacturing, infrastructure and technology.

Since the appointment of Tan Sri Dato’ Azman Mokhtar as its managing director

in May 2004, Khazanah has been transformed from a passive investment-holding

company to one that is more dynamic and forward looking. The Company has

created a framework for its transformation, focusing on 4 strategic pillars: the

restructuring of “legacy investments”; the transformation of GLCs; the acquisition

of new investments; and the development of human capital. This reflects

Khazanah’s early steps in balancing its role to ensure the achievement of its

commercial objectives vis-à-vis maximising shareholder returns, and its crucial

position in assisting the Government achieve its socio-economic goals.

By end-2008, the majority of the GLCs in Khazanah’s stable had completed their

restructuring i.e. TM Berhad (“TM”), the UEM Group, Malaysia Airports Holdings

Berhad (“MAHB”), with most of its legacy investments also having found a more

stable footing. This has allowed Khazanah to refocus its efforts in line with

diversifying its investment base from a geographical and sectoral perspective.

Between 2006 and 2008, Khazanah had intensified its efforts vis-à-vis foreign

investments in the financial-services sector and environmental sciences, with its

interests extending to the Middle East and China.


� Industry and Business Assessment

RAM Ratings notes that local investments still dominate Khazanah’s investment

portfolio. As at end-June 2009, domestic investments accounted for about 90%

of Khazanah’s portfolio, with the majority of them being GLCs. The GLCT

programme, which is now about mid-way through its 10-year tenure (2005 to

2015), encompasses several strategic transactions, corporate restructurings,

regionalisation of investments and landmark financing transactions that were

concluded in 2008, i.e. the demerger of the TM Group, the restructuring of the

UEM Group and the divestment of several key associates such as Time dot Com

Berhad, Tradewinds Hotels and Resorts Sdn Bhd and DRB-Hicom Berhad.

Khazanah has also increased stakes in major foreign investments, e.g.

Singapore-based healthcare provider Parkway Holdings Ltd (“Parkway”) (up to

23.93%) and several ventures (worth up to USD215 million) into the Middle

Eastern financial-services markets.

Investments in defensive and stable industries, with dominant or virtually

monopolistic role

Khazanah’s domestic portfolio contains strategic investments in defensive

industries where it has a virtually monopolistic role, i.e. the power sector (via

Tenaga Nasional Berhad or “TNB”), communications (via TM and Pos Malaysia

or “POS”) and infrastructure (via PLUS Expressways Berhad or “PLUS” and the

UEM Group). The Company also enjoys a dominant position in the healthcare

and financial industries through stakes in dominant healthcare provider - Pantai

Holdings Berhad (“Pantai”) and one of Malaysia’s largest financial-services

groups – CIMB Group Holdings Berhad (“CIMB Group”).

Table 2: Khazanah’s strategic investments as at 30 June 2009

Source: Khazanah

Tough year in 2008

Khazanah’s investment portfolio had shrunk along with the meltdown of the

global and regional markets; its overall RAV had diminished by 70% to RM69.47

2 Includes Khazanah’s direct and indirect interests via UEM.

Company Sector Shareholding (%)

MAHB Transportation 72.74

POS Logistics 32.21

UEM Group Construction 100.00

Pantai Holdings Healthcare 60.00

TNB Utilities 37.81

Axiata Group Berhad Media and Communications 44.51

TM Media and Communications 41.78

Iskandar Investment Berhad Property 60.00

CIMB Group Financial 28.43

PLUS Infrastructure 63.872


billion as at end-FY Dec 2008 (end-May 2008: RM88.2 billion) while its net worth3

had dwindled to RM35.61 billion (end-May 2008: RM53.1 billion)

4. Overall

shareholders’ returns from its listed portfolio contracted 35.7% in 2008, broadly in

line with the 36.2%5 plunge in the benchmark FTSE Bursa Malaysia Kuala

Lumpur Composite Index. Elsewhere, the performance of sovereign wealth funds

(“SWFs”) appeared to have rallied against general market movement -

registering a 4.9% growth in the first 7 months of 20086, However, Khazanah and

the SWFs are not directly comparable as the latter’s performance was buoyed by

substantial interests in oil-and-gas-based investments which had benefited from

escalating crude oil prices. Despite the challenging environment in 2008,

Khazanah still enjoyed dividends from its diversified base of subsidiaries and

associates.

Figure 1: Khazanah’s RAV between 2004 and 2008

Source: Khazanah

Table 3: Dividend payments from Khazanah’s key subsidiaries and associates

Company Dividend policy Khazanah's shareholding

(%)

Total dividends for FY Dec 2008 (RM million)

Khazanah’s portion

(RM million)

TM 90% of PATAMI 41.78 900 376

PLUS Min dividend growth of 12% y-o-y 63.87 825 527

TNB 60% of company’s free cashflow 37.80 646 244

MAHB 50% of profit after tax 72.74 153 111

CIMB 18.5 sen/share 28.44 619 176

Total 3,143 1,434

Source: Companies’ annual reports and official websites

*PATAMI = profit after tax and minority interest

3 Net worth consists of RAV less total liabilities 4 Source: Khazanah Media Statement, 19 January 2009 5 Source: Khazanah Media Statement, 19 January 2009 6 Source: Sovereign Wealth Fund Institute, www.swfinstitute.org. The assets of the SWFs incorporate official disclosure, fund creation, investment activity, capital injections and other variables.


G20’s performance proxy for Khazanah’s K9

The G20 is a collection of 20 of the largest GLCs controlled by government-

linked investment-holding companies (including those held by Khazanah). In

spite of the more challenging economic environment in 2008, much progress has

been achieved since 2004 – thanks to the GLCT programme. Although less than

the RM19.3 billion achieved in 2007, the aggregate earnings of the G20 came in

at RM14.7 billion in 2008 – some 53% higher than the pre-GLCT number of RM9

billion in 20047. As Khazanah has interests in 9 (referred to as “K9”) of the 20

GLCs within the G20 cluster, the performance of the larger group would be

relatively reflective of the K9’s showing in 2008. Given the harsh operating

environment last year, only 54% of the G20’s key performance indicators (“KPIs”)

had been met (2007: 76%).

While revenue and earnings had waned in 2008, the key entities of the K9 had

achieved a greater part of their KPIs, as highlighted in Table 4 below. The K9

had been in a much better position to weather the crisis as a result of their more

robust balance sheets and stronger operating fundamentals given that the

strategies under the GLCT programme were already mid-way through their cycle

(2004 to 2014).

Table 4: GLCs’ KPI achievements in 2008

Description GLC*

Met all headline KPIs MAHB Met most headline KPIs MAS, POS Malaysia, TNB Missed all headline KPIs TMI (now Axiata), CIMB Group

*UEM did not make any announcement for 2008 due to its de-listing exercise for restructuring purposes. Neither did TM and Proton as a result of their respective demerger and restructuring exercises.

� Major Investments/Performance of Assets

Iskandar Malaysia project still on track; key focus on infrastructure and

education

Khazanah is one of the key drivers of Malaysia’s largest development project to

date, i.e. Iskandar Malaysia (“IM”), through UEM Land Holdings Berhad (“UEM

Land”) and Iskandar Investment Berhad (“IIB”); the latter had formerly been

known as South Johor Investment Corporation Berhad.

Investments in IM mainly stem from privately funded initiatives, with the

Government primarily involved via infrastructure investments.

Khazanah invests directly in IM through IIB - the entity set up to drive

development and investment in certain areas within this development corridor.

IIB is 60%-owned by Khazanah while the remaining equity is equally owned by

7 Source: G-20 Annual Report, Bloomberg and PCG Analysis


the Employees Provident Fund and Kumpulan Prasarana Rakyat Johor, i.e. the

investment arm of the Johor State Government.

RAM Ratings understands that IIB may also form joint ventures with strategic

partners - both local and foreign - to invest in various IM projects. As a catalytic

developer within IM, IIB’s immediate focus is the education and tourism-related

sectors that are consistent with investments that have poured in to date.

The Government has earmarked RM6.83 billion8 under the Ninth Malaysia Plan

(“9MP”, 2006-2010) to ensure the continuous development of IM. Between 2006

and 2008, RM40.3 billion of investments had been secured, representing 85.6%

of the 5-year target of RM47 billion under the 9MP9. About RM4.7 billion has

been allocated for capital expenditure between 2009 and 2011. While there have

been reports that some investors have temporarily deferred their contributions

due to the global downturn, investments are expected to continue flowing in over

the medium term.

In the meantime, Khazanah will indirectly invest in IM projects via IIB, UEM Land

or its other GLCs, where appropriate. A portion of the RM10 billion allocated to

Khazanah under the second stimulus package will be pumped into IM, although

these projects will have long gestation periods.

Legacy investments continue turning around

Khazanah's biggest challenge has been in relation to its “legacy investments”

such as Silterra Malaysia Sdn Bhd, Malaysian Airline System Berhad (“MAS”)

and Proton Holdings Berhad (“Proton”). The restructuring and management

initiatives of MAS and Proton have led to much progress despite the generally

bleak investment landscape. In spite of the slowdown in the travel industry last

year, MAS posted a 2.7% growth in revenue and a 1.6% profit-after-tax margin

for fiscal 200810. While the numbers may seem meager, they are nonetheless

respectable given the national air carrier’s losses prior to 2008, and also in

comparison to the weak performance of the global airline industry; in October

2009, the International Air Transport Association (“IATA”) revised the industries’

(net income) loss estimates for 2008 from a loss of USD10.4 billion to a loss of

USD16.8 billion11. Despite this tumultuous environment, MAS managed to record

a RM246 million net income for the same period.

8 Source: “Iskandar Malaysia” official website at www.iskandar.com.my, “Iskandar maintains investment momentum despite slowdown”, dated 20 November 2008.

9 Source: Khazanah official website at www.khazanah.com.my, “Khazanah emphasizes crisis

preparedness measures and initiatives to catalyze economic growth”, media release dated 19 January 2009

10 Based on the financial performance of the company as shown on MAS official website, “5 years financial performance”, http://www.malaysiaairlines.com/my/en/corp/corp/relations/info/highlights/financial-highlights.aspx

11 Source IATA at official website at www.iata.org, “Deeper Losses Forecast - Falling Yields, Rising Fuel Costs”, dated 15 September 2009


In the first quarter of FYE 31 March 2010, Proton’s revenue was lifted 8% to

RM1.85 billion despite a 2% drop in sales volume (the industry’s sales had

declined 11%). The national car maker’s performance can be attributed to the

launch of its new multi-purpose model, Exora in April 2009.

Khazanah to “stand by” its investments

The management had previously highlighted a “soft touch” approach to handling

its “legacy investments”, i.e. it will not directly participate in their daily operations.

However, Khazanah is clearly committed to supporting its associates amid the

present tumultuous climate. Axiata Group Berhad (“Axiata”), the international

telecommunications arm of Khazanah and a spin-off from TM, had faced margin

compression due to the competitive operating environment, which had increased

its funding costs and foreign-exchange losses in 2008. To strengthen the balance

sheet and capital base of this fledgling company, Khazanah had subscribed for

RM2 billion of Axiata’s right issue; the Company is committed to subscribing for its

entire entitlement of 20% of all of Axiata’s unsubscribed shares.

Mixed bag of results in 2009

While financials are not expected to recover in 2009, the K9 companies have

been “stress tested”, with emphasis on “crisis management”; the key focus will be

on cashflow preservation and balance-sheet management. Given the equity

market’s rebound, the RAV of Khazanah’s portfolio had augmented to RM85

billion as at end-June 2009 (end-December 2008: RM69.47 billion); its net worth

had appreciated 34% (or RM11.1 billion) to RM44 billion over the same period,

translating into a healthy 2.1 times cover of its assets over its liabilities (end-

December 2008: 1.1 times)12.

To date, some GLCs have reported promising results in 2009, after accounting for

the expected protracted slowdown:

• CIMB achieved a 14.5% net return on equity (“ROE”) exceeding its KPI target

of 12.5% for the first quarter of fiscal 2009.

• Axiata has announced that it will be able to meet the upper range of its KPI

targets. Its revenue for the first half of fiscal 2009 came in at RM 6.03 billion,

with RM 622 million of pre-tax profit.

Currently focused on domestic sectors with “multiplier effect”

With the deceleration of the domestic economy in 2009 and the expectation of a

protracted recovery in 2010, Khazanah’s immediate focus is in catalytic and

transformative sectors on the domestic front, whilst remaining cautious on its

international investments. In FY Dec 2008, Khazanah invested approximately

RM3.2 billion in existing and new foreign ventures, compared to only a single

RM87.5 million investment in the first 7 months of 2009. The Company’s short-to-

12 Source: Invest Malaysia 2009 Keynote Address: “Graduating to a Higher Class – Catalyzing a New Domestic Economy”, 1 July 2009


medium-term focus will be on investing in local sectors that will have a “multiplier

effect” on the Malaysian economy; the intention is to create job opportunities,

reduce economic disparity, and eliminate hardcore poverty, among others. While

beneficial to the average person on the street from a social and economic

perspective, the fruits from such endeavours are only likely to be reaped over the

longer term.

Table 5: Foreign ventures between 2007 and July 2009

RM

million

Infrastructure

Development

Company (IDFC)

Mar-07 9.87% 630 Financial

Intermediary

for

Infrastructure

India

Parkway Holdings

Singapore

May-08 16.4% 1230 Healthcare Singapore

ACR Retakaful

Holdings

May-08 40% 1050 Insurance UAE

KCS Green

Energy

International

(Group)

Investments Co.

Ltd

Aug-08 JV 557 Waste-energy China

Khazanah India

Advisors Private

Limited

Sep-08 100% 2 Investment

Advisory

Services

India

Jadwa

Investment

Oct-08 10% 266 Fund

Management

Saudi Arabia

Small Bone

Innovations

Jul-09 23% 88 Medical USA

Business Country of

Operations

Company Date of

acquisition

Acquired

Interest

(%)

Source: Various Khazanah media releases and newspaper/magazine publications

Short-to-medium-term focus on domestic poverty and disadvantaged may

detract from realising superior returns

The Government’s current focus via the SEJAHTERA and PINTAR projects is

aimed at providing sustainable living conditions/infrastructure and adopting

schools, respectively. In line with this, RM10 billion (under the second stimulus

package) has been allocated to Khazanah and its stable of companies, to be

utilised for the implementation of investment plans in strategic, service-oriented

sectors that are deemed to have substantial multiplier effects, including

telecommunications, leisure and tourism, technology (including information and

communications technology (“ICT”), creative industries and sustainable

development or “green” technologies), healthcare and agriculture. The

investments in these sectors in 2009 and 2010 are aimed at creating an

estimated 70,000 jobs by 2011. Such sectors, with their emphasis on services

and intellectual property content, are generally in new areas; hence they are

more catalytic and should spur further participation over time.


� Financial Assessment

Table 6: Khazanah’s key financial indicators (with adjustments)

FY Dec 2006 2007 2008

Absolute (RM million)

Revenue 2,076.52 7,110.78 6,130.37

OPBDIT 1,910.37 5,885.59 5,769.75

Pre-tax profit 943.21 4,725.39 1,553.89

Adjusted total debts 23,578.22 23,653.31 33,139.66

Total debts 23,418.20 21,590.58 28,773.12

Profitability (%)

After-tax return on equity 5.58 26.74 6.63

Adjusted Return on capital employed 5.13 14.26 5.08

Return on capital employed 5.16 15.02 5.55

Capitalisation (times)

Adjusted gearing ratio 1.82 1.40 1.83

Gearing ratio 1.81 1.27 1.59

Adjusted net gearing ratio 1.72 1.37 1.74

Net gearing ratio 1.71 1.25 1.25

Adjusted Debt-capital ratio 0.65 0.58 0.65

Debt-capital ratio 0.64 0.56 0.61

Debt coverage (times)

Interest coverage ratio 2.06 6.34 4.82

Operating cashflow interest coverage ratio 5.44 6.65 1.64

Adjusted FFO debt coverage ratio (0.01) (0.01) (0.01)

FFO debt coverage ratio (0.01) (0.01) (0.01)

Adjusted OCF debt coverage 0.09 0.14 0.02

OCF debt coverage 0.09 0.16 0.02

Adjusted FOCF debt coverage ratio 0.09 0.14 0.02

FOCF debt coverage ratio 0.09 0.16 0.16

OPBDIT = operating profit before depreciation, interest and tax

FFO = funds from operations

OCF = operating cashflow

FOCF = free operating cashflow

* All “adjusted” figures stated above include amounts due to holding and related companies.

Shrinking revenue and profits

Despite higher dividend income (highlighted in Table 8), Khazanah’s revenue

and profit-after-tax (“PAT”) decreased in fiscal 2008 – largely due to smaller

gains from its divestments, which had accounted for 63.6% of its total revenue for

FY Dec 2007 against only 14.31% in FY Dec 2008. The gains from the

divestment of its investments in FY Dec 2008 had been reduced by the bleak

market conditions, with a RM3.09 billion allowance for impairment losses in

investments and provisions for the year.


Table 7: Sources of Khazanah’s income

Highly leveraged balance sheet

Khazanah’s balance sheet had a reasonably high level of borrowings, with a

RM33.14 billion debt burden13 as at end-FY Dec 2008 (end-FY Dec 2007:

RM23.65 billion), including borrowings financed via special-purpose vehicles, of

which the Company remained the ultimate obligor. Khazanah’s gearing and net

debt-to-asset ratios had climbed to 1.83 and 0.61 times at end-FY Dec 2008

(end-FY Dec 2007: 1.40 and 0.56 times). At the same time, its OPBDIT debt

coverage ratio thinned to 0.17 times (end-FY Dec 2007: 0.29 times) – largely due

to a doubling of the amounts owed to related companies vis-à-vis its financing

vehicles. Nonetheless, Khazanah’s hefty debt obligations are balanced by the

stable cashflow from its diversified base of dividend receipts, not to mention its

ability to monetise its highly liquid investments if need be.

Off-balance-sheet commitments rise in line with investment plans

As at end-FY Dec 2008, Khazanah’s contingent liabilities had swelled 356% to

RM3.62 billion; this includes RM2.3 billion as part of a guarantee for a bank loan

taken by an offshore financing subsidiary. We understand that this is in line with

Khazanah’s preparation vis-à-vis financing potential investments. RAM Ratings

notes that Khazanah’s funding strategy has predominantly encompassed

exchangeable sukuk, to allow the Company to monetise its assets amid

appropriate market conditions or via multi-currency programmes through special-

purpose vehicles - to provide a natural foreign-exchange hedge for its

international investments.

� Financial Flexibility and Liquidity

Khazanah enjoys substantial financial flexibility from the presence of MOF Inc as

its sole shareholder (discounting the Federal Land Commissioner’s 1 share); this

enables the Company to tap the capital markets at competitive financing rates.

Although the Government has not extended any explicit guarantee to Khazanah’s

debt obligations, except for its government-guaranteed bonds, we opine that the

Government should readily extend its support to Khazanah, if required.

13 Includes amounts owed to related companies.

FY Dec 2006 FY Dec 2007 FY Dec 2008

RM mil % RM mil % RM mil %

Dividend income 1,637.07 78.84 2,332.25 32.80 4,885.04 79.69

Interest income 169.96 8.18 250.50 3.52 365.41 5.96

Gains from

divestments 267.66 12.89 4,525.76 63.64 877.12 14.31

Others 1.83 0.09 2.27 0.03 2.80 0.05

Total income 2,076.52 100 7,110.78 100 6,130.37 100


Meanwhile, Khazanah’s funding mix includes a substantial amount of

exchangeable bonds/sukuk, which allows the Company to manage its cashflow

and also to divest/monetise its assets when market conditions are conducive.

Khazanah’s entire investment portfolio (quoted and unquoted holdings) was

valued at approximately RM39.70 billion as at end FY Dec 2008 (end-FY Dec

2007: RM35.17 billion). This underpins its flexibility vis-à-vis refinancing its debt

obligations and to meet additional funding requirements through asset sales, as

well as to leverage on these assets to tap the debt and capital markets. We opine

that Khazanah has minimal refinancing risk given the sheer size and nature of its

investment portfolio, along with its easy access to both domestic and

international debt-capital markets, underscored by its favourable position as the

Government’s investment arm.

Table 8: Khazanah’s debt-maturity profile as at end-FY Dec 2008

FY Dec 2009 FY Dec 2010 FY Dec 2011 Beyond 2011 Total

(RM'000) (RM'000) (RM'000) (RM'000) (RM'000)

Khazanah Government-Guaranteed Bonds 2,261,660 962,440 - 4,227,661 7,451,761

Islamic Commercial Papers / Islamic Medium Term Notes 479,250 - 2,200,000 4,800,000 7,479,250

Unsecured Term Loans 450,000 3,550,000 150,000 2,000,000 6,150,000

Exchangeable Trust Certificates - - 2,781,213 4,910,894 7,692,107

Total 3,190,910 4,512,440 5,131,213 15,938,555 28,773,118

Source: Khazanah

� Management Assessment

Tan Sri Azman Mokhtar’s long-term strategy for Khazanah includes the

divestment or trimming of the Company’s stakes in GLCs. While a minimal equity

reduction in such entities is not unusual, we believe that Khazanah is unlikely to

substantially reduce its interests in industries deemed of national importance,

such as its holdings in TNB, TM and POS. Nonetheless, Khazanah has the

flexibility of decreasing its equity in these entities but still retain its dominant

interest at the holding-company level (e.g. Plus-UEM and MAS-PMB). For

instance, Khazanah still holds 67.7% of MAHB after the divestment of its 5%

stake in MAHB in September 2009.

The management has highlighted that despite the global downturn, Khazanah’s

investment parameters have not changed, except for its geographical focus. The

latter is aimed at boosting the domestic economy between 2009 and 2011. The

Company’s key investment parameters include the following:


i) Focus sectors: telecommunications, leisure and tourism, technology (including

ICT, creative industries and sustainable development or “green” technologies),

life sciences, healthcare and agriculture.

ii) Geographical concentration: China, the Middle East, Indonesia, India and

Singapore

While Khazanah’s strategy does not preclude international ventures, the

management has highlighted that they will adopt a more cautious approach on

foreign investments. Nonetheless, we expect Khazanah’s solid asset base and

the Government’s implicit support to allow the Company to ride through the

current recession. Given the challenging enivronment, the managements’ abitlity

to venture in to foreign-commercial ventures may have to be put on hold

temporarily as Khazanah’s short-term focus seems to be on more altruistic

investments - in line with the Government’s objective of cushioning the harsh

effects of the bleak macroeconomic landscape.


� Corporate Information – Rantau Abang Capital Berhad

Date of Incorporation:

30 September 2004

Commencement of Business:

N/A

Major Shareholders:

Khazanah Nasional Berhad

100%

Directors:

Mohd Nadziruddin Mohd Basri Mohd Izani Ghani Katina Tan Yee Shan

Auditor:

Ernst & Young

Listing:

Not listed

Capital History:

Year Remarks Amount (RM)

Cumulative Total (RM)

2004 Issued and paid up 2 2


BALANCE SHEET (RM million) 31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08

Property, Plant & Equipment 1.81 7.98 9.88 10.37 22.22

Investment in Subsidiaries & Associates 16,805.24 23,721.61 26,253.12 30,157.91 36,664.86

Deferred Tax Assets 276.58 395.70 127.12 429.04 335.84

Other Investments & Non-Current Assets 9,020.14 4,500.15 4,275.21 4,578.27 2,700.35

Goodwill & Intangible Assets 0.00 0.00 5.00 3.98 2.99

Total Non-Current Assets 26,103.77 28,625.44 30,670.34 35,179.57 39,726.25

Inventory 0.00 0.00 0.00 0.00 0.00

Trade Receivables 0.00 0.00 0.00 0.00 0.00

Other Current Assets 4,093.08 2,621.01 2,811.49 1,751.97 3,226.39

Amounts Due from Holding Companies 0.00 729.77 1,288.84 188.84 877.96

Amounts Due from Related Companies 0.00 291.07 1,388.02 3,664.74 6,657.80

Cash & Bank Balances 638.95 1,099.66 1,271.20 433.36 1,518.02

Total Current Assets 4,732.03 4,741.51 6,759.54 6,038.91 12,280.17

Total Assets 30,835.80 33,366.94 37,429.88 41,218.48 52,006.42

Equity Share Capital 5,404.02 5,404.02 5,404.02 5,443.95 5,443.95

Equity-Like Hybrid Capital 0.00 0.00 0.00 0.00 0.00

Reserves 3,300.19 3,300.19 3,300.19 3,840.25 3,840.25

Retained Profits/(Accumulated Losses) 4,498.23 3,539.08 4,231.28 7,662.48 8,865.94

Minority Interests 0.00 0.00 0.00 0.00 0.00

Total Shareholders' Funds & Minority Interests 13,202.43 12,243.28 12,935.48 16,946.68 18,150.14

Short-Term Private Debt Securities 0.00 2,557.86 1,988.09 3,906.99 2,740.91

Amounts Due to Related Companies 0.00 1,276.66 160.03 2,062.72 4,366.54

Amounts Due to Holding Companies 0.00 0.00 0.00 0.00 0.00

Other Short-Term Debts 550.00 1,950.00 5,300.00 450.00 450.00

Trade Payables 0.00 0.00 0.00 0.00 0.00

Taxation 0.00 27.60 0.00 0.00 0.00

Dividends Payable 0.00 0.00 0.00 0.00 0.00

Other Current Liabilities 911.17 798.17 677.89 343.34 404.55

Total Current Liabilities 1,461.17 6,610.29 8,126.01 6,763.06 7,962.00

Long-Term Deferred Liabilities 0.00 235.92 238.28 275.16 312.08

Debt-Like Hybrid Capital 0.00 0.00 0.00 0.00 0.00

Long-Term Private Debt Securities 16,172.20 7,377.45 14,530.10 16,083.59 19,882.21

(Sinking Fund) 0.00 0.00 0.00 0.00 0.00

Other Long-Term Debts 0.00 6,900.00 1,600.00 1,150.00 5,700.00

Total Non-Current Liabilities 16,172.20 14,513.37 16,368.38 17,508.75 25,894.28

Total Liabilities 17,633.37 21,123.66 24,494.40 24,271.81 33,856.29

Shareholders' Funds & Minority Interests + Total Liabilities 30,835.80 33,366.94 37,429.88 41,218.48 52,006.42

FINANCIAL SUMMARY Khazanah Nasional Berhad - Company


INCOME STATEMENT (RM million) 31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08

Revenue 3,394.92 2,262.44 2,076.52 7,110.78 6,130.37

Operating Profit/(Loss) Before Depreciation, Interest & Tax 1,099.25 54.07 1,910.37 6,850.89 5,769.75

Depreciation & Amortisation (0.31) (2.04) (4.06) (5.71) (5.55)

Operating Profit/(Loss) Before Interest & Tax 1,098.94 52.03 1,906.30 6,845.18 5,764.20

Finance Costs (816.55) (822.83) (925.73) (1,081.10) (1,196.51)

Debt-Related Foreign Exchange Gain/(Loss) 0.04 (1.25) (5.39) 18.00 147.13

Operating Profit/(Loss) Before Tax 282.43 (772.06) 975.19 5,782.08 4,714.82

Allowance for Impairment Losses in Investments/Other Provisions 0.00 0.00 0.00 (965.29) (3,094.99)

Non-Recurring Items (0.17) (31.26) (31.98) (91.39) (65.94)

Share of Associated Companies'/Joint Ventures' Profits/(Losses) 0.00 0.00 0.00 0.00 0.00

Pre-Tax Profit/(Loss) 282.26 (803.32) 943.21 4,725.40 1,553.89

Taxation (73.29) (125.84) (221.01) (194.21) (350.43)

Net Profit/(Loss) 208.97 (929.16) 722.20 4,531.20 1,203.46

Minority Interests 0.00 0.00 0.00 0.00 0.00

Dividends (30.00) (30.00) (30.00) (1,100.00) 0.00

Post-Distribution Profit/(Loss) 178.97 (959.16) 692.20 3,431.20 1,203.46

CASHFLOW STATEMENT (RM million) 31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08

Pre-Tax Profit/(Loss) 282.26 (803.32) 943.21 4,725.40 1,553.89

Adjustments (480.67) 691.65 (1,088.22) (4,986.54) (1,912.04)

Operating Profit/(Loss) Before Working Capital Changes (198.41) (111.67) (145.01) (261.14) (358.16)

Tax Paid (147.06) 57.42 (1.67) 46.01 13.33

Funds from Operations (345.47) (54.25) (146.67) (215.12) (344.82)

Changes in Working Capital 117.59 (216.62) 967.53 1,537.13 (3,924.49)

Other Income/(Expenses) 743.73 1,276.47 1,316.64 2,078.93 4,800.73

Net Cashflow from Operating Activities 515.86 1,005.61 2,137.50 3,400.93 531.42

Capital Expenditure (2.03) (9.97) (6.04) (5.67) (16.37)

Free Operating Cashflow 513.82 995.64 2,131.46 3,395.26 515.05

Other Investing Outflows (2,892.92) (3,055.77) (2,444.29) (6,968.29) (10,651.74)

Investing Inflows 4,342.17 472.74 798.32 3,983.81 5,286.06

Pre-Financing Cashflow 1,963.08 (1,587.39) 485.50 410.78 (4,850.64)

Interest Payments (301.13) (366.57) (392.99) (511.49) (323.30)

Net Changes in Borrowings (1,493.46) 1,614.19 (496.58) (3,406.25) 5,827.12

Dividend Payments (30.00) (30.00) (30.00) (1,100.00) 0.00

Others 58.35 830.46 605.61 3,769.13 431.47

Net Increase/(Decrease) in Cash & Cash Equivalents 196.83 460.70 171.54 (837.84) 1,084.65

Opening Cash Balance 442.12 638.96 1,099.66 1,271.20 433.36

Closing Cash Balance 638.95 1,099.66 1,271.20 433.36 1,518.02

FINANCIAL SUMMARY Khazanah Nasional Berhad - Company


KEY RATIOS 31-Dec-04 31-Dec-05 31-Dec-06 31-Dec-07 31-Dec-08

PROFITABILITY (%):

OPBDIT Margin 32.38% 2.39% 92.00% 96.35% 94.12%

OPBIT Margin 32.37% 2.30% 91.80% 96.26% 94.03%

Pre-Tax Profit Margin 8.31% (35.51%) 45.42% 66.45% 25.35%

Net Profit Margin 6.16% (41.07%) 34.78% 63.72% 19.63%

After-Tax Return on Equity 1.58% (7.59%) 5.58% 26.74% 6.63%

Return on Capital Employed 3.67% 0.06% 5.13% 14.26% 5.08%

CAPITALISATION (TIMES):

Gearing Ratio 1.27 1.64 1.82 1.40 1.83

Net Gearing Ratio 1.22 1.55 1.72 1.37 1.74

Debt-Capital Ratio 0.56 0.62 0.65 0.58 0.65

DEBT COVERAGE (TIMES):

Interest Coverage Ratio 1.35 0.07 2.06 6.34 4.82

Operating Cashflow Interest Coverage Ratio 1.71 2.74 5.44 6.65 1.64

OPBDIT Debt Coverage Ratio 0.07 0.00 0.08 0.29 0.17

Funds from Operations Debt Coverage Ratio (0.02) (0.00) (0.01) (0.01) (0.01)

Operating Cashflow Debt Coverage Ratio 0.03 0.05 0.09 0.14 0.02

Free Operating Cashflow Debt Coverage Ratio 0.03 0.05 0.09 0.14 0.02

LIQUIDITY (TIMES):

Current Ratio 3.24 0.70 0.51 0.46 1.32

Quick Ratio 3.24 0.70 0.51 0.46 1.32

CASH CYCLE (DAYS)

Receivables Cycle 0.00 0.00 0.00 0.00 0.00

Payables Cycle 0.00 0.00 0.00 0.00 0.00

Inventory Cycle 0.00 0.00 0.00 0.00 0.00

Operating Cash Cycle 0.00 0.00 0.00 0.00 0.00

OPBDIT = Operating Profit Before Depreciation, Interest & Tax

OPBIT = Operating Profit Before Interest & Tax

FINANCIAL RATIOS Khazanah Nasional Berhad - Company


KEY FINANCIAL RATIOS FORMULAE

PROFITABILITY (%):

OPBDIT Margin OPBDIT / Revenue

OPBIT Margin OPBIT / Revenue

Pre-Tax Profit Margin Pre-Tax Profit / Revenue

Net Profit Margin Net Profit / Revenue

After-Tax Return on Equity Net Profit / (Shareholders' Funds + Minority Interests)

Return on Capital Employed (Pre-Tax Profit + Finance Costs* + Debt-Related Foreign Exchange Loss/(Gain)) /

(Total On-Balance Sheet Debts + Shareholders' Funds + Minority Interests)

CAPITALISATION (TIMES):

Gearing Ratio Total On-Balance Sheet Debts / (Shareholders' Funds + Minority Interests)

Net Gearing Ratio (Total On-Balance Sheet Debts - Cash & Bank Balances) / (Shareholders' Funds + Minority Interests)

Debt-Capital Ratio Total On-Balance Sheet Debts / (Shareholders' Funds + Minority Interests + Total On-Balance Sheet Debt)

DEBT COVERAGE (TIMES):

Interest Coverage Ratio OPBDIT / (Finance Costs* + Preference Share Dividends + Interest Capitalised +

Realised Debt-Related Foreign Exchange Loss/(Gain))

Operating Cashflow Interest Coverage Ratio Net Operating Cashflow / (Interest Paid* + Preference Share Dividends Paid +

Realised Debt-Related Foreign Exchange Loss/(Gain))

OPBDIT Debt Coverage Ratio OPBDIT / Total On-Balance Sheet Debts

Funds from Operations Debt Coverage Ratio Funds from Operations / Total On-Balance Sheet Debts

Operating Cashflow Debt Coverage Ratio Net Operating Cashflow / Total On-Balance Sheet Debts

Free Operating Cashflow Debt Coverage Ratio Free Operating Cashflow / Total On-Balance Sheet Debts

LIQUIDITY (TIMES):

Current Ratio (Current Assets - Amounts Due from Related Parties) /

(Current Liabilities - Amounts Due to Related Parties)

Quick Ratio (Current Assets - Amounts Due from Related Parties - Inventory) /

(Current Liabilities - Amounts Due to Related Parties)

CASH CYCLE (DAYS)

Receivables Cycle Trade Receivables / Revenue x 365

Payables Cycle Trade Payables / Cost of Sales x 365

Inventory Cycle Total Inventory / Cost of Sales x 365

Operating Cash Cycle Receivables Cycle - Payables Cycle + Inventory Cycle

* Include on-going, non-discretionary payments on hybrid securities, if any.

OPBDIT = Operating Profit Before Depreciation, Interest & Tax

OPBIT = Operating Profit Before Interest &Tax

FINANCIAL RATIOS Khazanah Nasional Berhad - Company


CREDIT RATING DEFINITIONS

Issue Ratings - Partnership-Based Sukuk

Long-Term Ratings

AAA

AA

A

BBB

BB

B

C

D

Short-Term Ratings

P1

P2

P3

NP

D

A sukuk rated AAA has superior safety for payment of capital and expected returns. This is the highest long-termIssue Rating assigned by RAM Ratings to a partnership-based sukuk.

A sukuk rated AA has high safety for payment of capital and expected returns. The issuer is resilient againstadverse changes in circumstances, economic conditions and/or operating environments.

A sukuk rated A has adequate safety for payment of capital and expected returns. The issuer is more susceptible toadverse changes in circumstances, economic conditions and/or operating environments than those in higher-ratedcategories.

A sukuk rated BBB has moderate safety for payment of capital and expected returns. The issuer is more likely to beweakened by adverse changes in circumstances, economic conditions and/or operating environments than those inhigher-rated categories. This is the lowest investment-grade category.

A sukuk rated BB has low safety for payment of capital and expected returns. The issuer is highly vulnerable toadverse changes in circumstances, economic conditions and/or operating environments.

A sukuk rated B has very low safety for payment of capital and expected returns. The issuer has a limited ability towithstand adverse changes in circumstances, economic conditions and/or operating environments.

A sukuk rated C has a high likelihood of not meeting the payment of capital and expected returns. The issuer ishighly dependent on favourable changes in circumstances, economic conditions and/or operating environments, thelack of which would likely result in it not fulfilling the terms of the investment contract.

A sukuk rated D is either currently not meeting or will not meet the payment of capital and expected returns. The Drating may also reflect a distressed exchange, the filing of bankruptcy and/or other actions pertaining to the issuerthat could jeopardise the fulfilment of the investment contract's terms.

A sukuk rated P1 has high safety for payment of capital and expected returns in the short term. This is the highestshort-term Issue Rating assigned by RAM Ratings a partnership-based sukuk.

A sukuk rated P2 has adequate safety for payment of capital and expected returns in the short term. The issuer ismore susceptible to the effects of deteriorating circumstances than those in the highest-rated category.

A sukuk rated P3 has moderate safety for payment of capital and expected returns in the short term. The issuer ismore likely to be weakened by the effects of deteriorating circumstances than those in higher-rated categories. Thisis the lowest investment-grade category.

A sukuk rated NP has doubtful safety for payment of capital and expected returns in the short term. The issuer facesmajor uncertainties that could compromise its capacity for fulfiling the terms of the investment contract.

A sukuk rated D is either currently not meeting or will not meet the payment of capital and expected returns. The Drating may also reflect a distressed exchange, the filing of bankruptcy and/or other actions pertaining to the issuerthat could jeopardise the fulfilment of the investment contract's terms.

For long-term ratings, RAM Ratings applies subscripts 1, 2 or 3 in each rating category from AA to C. The subscript 1 indicates thatthe issue ranks at the higher end of its generic rating category; the subscript 2 indicates a mid-ranking; and the subscript 3 indicatesthat the issue ranks at the lower end of its generic rating category. In addition, RAM Ratings applies the suffixes (bg) or (s) to ratingswhich have been enhanced by a bank guarantee or other supports, respectively.

An Issue Rating for a partnership-based sukuk is RAM Ratings' current opinion on the creditworthiness of a particularpartnership-based sukuk. It reflects the overall capacity and willingness of an issuer to meet the payment of capital andexpected returns on a full and timely basis, taking into account the expressed terms and conditions of the investmentcontract. RAM Ratings’ sukuk ratings are, however, not a measure of compliance with Shariah principles or the role,formation, practices, legitimacy and soundness of the Shariah advisors’ recommendations and decisions.


RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes

third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has

no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the

objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM

Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Published by RAM Rating Services Berhad

Reproduction or transmission in any form is prohibited except by

permission from RAM Ratings.

Copyright 2009 by RAM Ratings

RAM Rating Services Berhad

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Documents

Rantau Abang Rationale 2009