Fitch downgrades Malaysia's Petronas to A-, outlook stable

Fitch Ratings has downgraded Malaysia-based Petroliam Nasional Bhd (Petronas)'s Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) to "A-" from "A", with a stable outlook.

It has alsod affirmed its Short-Term Foreign-Currency IDR at 'F1'.

At the same time, Fitch has also downgraded Petronas' foreign-currency senior unsecured rating and the ratings on debt issued by Petronas Capital Ltd and guaranteed by Petronas to "A-" from "A", it said in statement today.

However, Petronas continues to maintain a strong standalone credit profile, assessed by Fitch at "AA-", said the rating agency.

It said the rating action followed the downgrade of Malaysia's Long-Term Local-Currency (LTLC) IDR to "A-" from "A", in line with the updated guidance contained in Fitch's revised sovereign rating criteria dated July 18, 2016.

Fitch concluded that Malaysia's credit profile no longer supported a notching up of the LTLC IDR above the Long-Term Foreign-Currency IDR.

This reflects Fitch's view that neither of the two key factors, cited in the criteria that support the upward notching of the LTLC IDR are present for Malaysia.

Those two key factors are strong public finance fundamentals relative to external finance fundamentals and previous preferential treatment of local-currency creditors relative to foreign-currency creditors.

Fitch said Petronas' IDRs are constrained by Malaysia's IDRs.

The reasons in support of Malaysia's LTLC IDR downgrade also weakened the case for rating Petronas' foreign-currency obligations above the sovereign foreign-currency rating as Petronas is 100 per cent-owned by Malaysia and the government can exert significant influence over its operating and financial policies.

Among others, Fitch expected Petronas to pay a lower dividend of RM16 billion in 2016, down from RM26 billion in 2015, and RM29 billion in 2014.

"With this reduction in dividends, Fitch expects Petronas to meet a majority of its capital expenditure (capex) from internal cash generation, even though operating cash generation is likely to be weaker due to low commodity prices," it said.

However, in Fitch's view, Petronas would continue to make sizeable contribution to government revenue.

"Any sustained reduction in its dividend payments remains predicated on the government's policy and its financial requirements given the government's reliance on Petronas for state revenue," it added.

On other developments, the rating agency said it expected Petronas' capex programme to remain significant, including capex on the downstream Refinery and Petrochemical Integrated Development project in Malaysia and the liquefaction and production facilities associated with its Canadian joint venture, Pacific NorthWest Liquefied Natural Gas project.

The key assumptions used by Fitch is the oil price based on Fitch's Brent price deck of US$33/barrel in 2016, US$45 in 2017 and US$55 in 2018, dividend payment of RM16 billion in 2016 and capex to average RM50 billion over 2016 to 2018.