Investing.com -- S&P Global Ratings has affirmed the ’BBB’ long-term issuer credit rating on Axiata Group Bhd., despite the company’s expected weaker earnings quality due to the nearing completion of the merger between its Indonesian mobile subsidiary, XL Axiata Tbk. PT, and Smartfren Telecom (BCBA: TECO2m ) Tbk. PT. S&P also affirmed the ’BBB’ long-term issue ratings on Axiata’s senior unsecured notes and sukuk.
The anticipated decline in Axiata’s earnings quality stems from its loss of control over XL Axiata and a growing reliance on cash flow from higher-risk markets. As a result, S&P has revised down its assessment of Axiata’s stand-alone credit profile to ’bbb-’ from ’bbb’. Despite this weaker stand-alone position, the company is expected to receive moderate support from the government of Malaysia if necessary.
The merger will result in Axiata’s stake in the new entity, XLSmart, being reduced to 34.8% from its current 66.5% stake in XL Axiata. This will lead to a substantial fall in the company’s adjusted EBITDA, with XL Axiata previously accounting for about 45% of this figure in 2024.
Following the merger, Axiata’s adjusted EBITDA, including dividends from XLSmart, is expected to be more volatile due to the discretionary nature of dividends and XLSmart’s other cash flow requirements, such as capital expenditure. S&P’s base case assumes Axiata’s adjusted EBITDA will average between MYR 6.5 billion and MYR 7 billion over the next two years, down from MYR 11.7 billion in 2024.
The merger has cleared key approvals, with Axiata announcing on March 20, 2025, that it has received regulatory approvals from Indonesia’s Financial Services Authority and Bank Negara Malaysia. The transaction also received in-principle approval from the Indonesia Stock Exchange and Indonesia’s Ministry of Communications and Digital Affairs. Shareholders of Axiata, XL Axiata, Smartfren, and Smart Telecom PT approved the merger on March 24 and 25.
After the merger, Axiata will derive more than 70% of its consolidated adjusted EBITDA from higher-risk emerging markets such as Bangladesh, Sri Lanka, and Cambodia. This will expose Axiata’s earnings to greater risk, as these countries face more regulatory and volatility risk than mature markets like Malaysia and Indonesia.
Despite the anticipated negative impact of the merger, XLSmart is expected to be a close third in Indonesia’s mobile communications market, not far behind Indosat Tbk. PT. A more consolidated market typically means less competition, and XLSmart’s combined customer base and network will likely generate savings through efficiencies on cost and capex.
Axiata plans to continue reducing leverage, using most of the US$475 million (MYR 2.1 billion equivalent) proceeds from the transaction to pay down debt, including a US$250 million term loan due in June 2025. S&P forecasts Axiata’s debt-to-EBITDA ratio will stay under 3x in 2025, before easing further to 2.5x-2.8x in 2026.
The ’BBB’ rating reflects S&P’s view of a moderate likelihood of extraordinary support from the government of Malaysia if needed. As of the end of February 2025, Malaysian sovereign investment fund Khazanah Nasional Bhd. and other government-related entities owned close to 70% of Axiata.
The stable outlook on Axiata reflects S&P’s view that the company’s geographically diversified business will partially mitigate volatilities in frontier markets. This will translate into stable operating performance and moderately improve its leverage over the next 18-24 months.
A downgrade of Axiata’s rating could occur if the company’s earnings quality or leverage weakens, or if the likelihood of extraordinary support from Malaysia’s government weakens. An upgrade is unlikely over the next 24 months, as it would require a two-notch upward revision in S&P’s assessment of the SACP from ’bbb-’. S&P may raise the SACP by one notch if Axiata adopts a more conservative financial policy such that its ratio of debt to EBITDA stays below 2.0x.
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