MARC Ratings has assigned a preliminary rating of A-IS to Yinson Holdings Berhad’s RM1.0 billion Subordinated Perpetual Islamic Notes Programme (perpetual sukuk). Concurrently, the rating agency has affirmed the existing A+IS rating on the group’s RM1.0 billion Islamic Medium-Term Notes (IMTN) Programme (senior sukuk). The two-notch rating differential between Yinson’s perpetual sukuk and senior sukuk ratings is based on MARC Ratings’ notching principles for subordinated debt and hybrid securities. The outlook on all ratings is stable.
Yinson’s established track record in providing floating, production, storage and offloading vessels (FPSOs) for the oil and gas (O&G) industry, its strong earnings visibility from sizeable charter contracts, and healthy profit margins remain key rating drivers. The ratings are mainly tempered by concerns on the elevated capital requirements resulting in growing borrowings, weakening its overall credit metrics.
Over the next three years, Yinson is expected to incur further borrowings for its ongoing projects, with total borrowings now expected to peak at around RM21.0 billion by FY2026 from an earlier assumption of RM17.5 billion in April 2023. The increase also includes new US$530 million term loans from private equity funds to part finance the equity portion in two of its ongoing projects, namely FPSO Maria Quiteria and FPSO Agogo. Yinson’s projected gross recourse debt-to-equity (DE) ratio for FY2024 is now around 1.64x (1H2024: 1.46x), taking into consideration the lifting of Yinson’s guarantee on FPSO Anna Nery’s obligations of RM3.4 billion by end-December 2023. MARC Ratings expects that with the completion of FPSO Maria Quiteria in 4Q2024 and the subsequent release of Yinson’s guarantee of around RM4.0 billion on the project’s loans, pressure on recourse DE would ease and return it to below 1.5x by end-2025.
Proceeds from the issuance of up to RM640.0 million under the rated perpetual sukuk will be mainly used to refinance the group’s unrated US$120 million perpetual bonds in March and April 2024. The proposed issuance of perpetual sukuk is expected to be accorded a 50% equity credit based on a proposed call period of five years after issuance under the aforementioned methodology.
Yinson’s order book has expanded to US$22.2 billion from US$20.4 billion in April 2023, following the exercise of its call option to fully purchase FPSO Atlanta in July 2023. The rating agency notes that its nine FPSO/FSO charter contracts provide long-term earnings visibility (average tenure: 15.7 years). Yinson’s earnings profile benefits from stable charter income, driven by strong operating performance of the FPSOs with a near 100% technical uptime.
In the first half of financial year ending January 2024 (1HFY2024), Yinson’s recurring revenue improved to RM1.0 billion (+22.9% y-o-y) due to additional contribution from FPSO Anna Nery. Recurring revenue and earnings growth will be derived from the time charter contracts of FPSO Atlanta, FPSO Maria Quiteria and FPSO Agogo upon their deployments in 4Q2024 and 4Q2025. These contracts command relatively higher daily charter rates relative to existing FPSOs.
Cash flow from operations was higher at RM2.7 billion, largely driven by the increase in recurring revenue as well as favourable movements in working capital. Free cash flow (FCF) remained negative due to high capex requirements. The rating agency expects FCF to stay negative on account of large capex until construction completion in 2025, and given that the group has no plans to undertake further FPSO projects in the near term. The group’s available cash balances declined to RM1.2 billion (FY2023: RM1.5 billion) following outflow to part fund construction works.
At the company level, Yinson relies on residual cash flows, mainly in the form of dividends from subsidiaries and joint ventures. Its key financial obligations as at end-July 2023 are: (1) outstanding perpetual securities amounting to RM1.8 billion issued at the holding company level as well as at two special purpose vehicles; (2) term loans and revolving credit amounting to RM1.4 billion; and (3) RM1.0 billion under the IMTN sukuk programme. Near-term obligations (excluding perpetuals and revolving credit) remain manageable at around RM535.0 million.