KUALA LUMPUR (Dec 12): Moody’s Investors Service (Moody's) has reaffirmed Axiata Group Bhd’s (KL:AXIATA) Baa2 issuer rating, citing the company’s strong liquidity and financial management despite growing exposure to frontier market risks and operational complexities arising from the merger between its 66.5%-owned XL Axiata Tbk (XL) and PT Smartfren Telecom Tbk (Smartfren).

Moody affirmed the Baa2 rating on Axiata’s senior unsecured sukuk issuance programme under Axiata SPV2 Bhd, as well as the medium-term note programme by Axiata SPV5 (Labuan) Ltd, alongside senior unsecured notes issued by the two wholly-owned subsidiaries.

The rating affirmation takes into account Axiata's increasingly complex group structure, following the proposed deconsolidation of XL, according to Moody’s vice-president and senior credit officer Nidhi Dhruv.

“The changes in the group structure increases Axiata's exposure to frontier market risks, which on a pro forma basis, will constitute approximately 60% of the consolidated Ebitda in 2025,” he added.

This came as Axiata announced on Wednesday a merger between XL and Smartfren, creating PT XLSmart Telecom Sejahtera Tbk (Indonesia MergeCo). After the transaction, Axiata's shareholding will decrease to 34.8% and the entity will be deconsolidated.

Moody's noted that Axiata’s financial discipline, along with its diversified portfolio and strong market positions, will help mitigate potential regulatory and operational uncertainties.

"The quality of cash flows being upstreamed to Axiata holding company are still predominantly investment grade quality from emerging markets of Malaysia and Indonesia. Per our estimates, CelcomDigi Bhd (KL:CDB) and Indonesia MergeCo will contribute 11% of Ebitda but 55% of the dividends," the rating agency said. 

Axiata is said to receive a share equalisation payment of US$400 million (RM1.7 billion) upon completion of the merger, the majority of which will be used to reduce debt at the Axiata holding company level. The company will also receive an additional US$75 million after one year, subject to fulfilment of certain conditions.

"As such, we expect the consolidated leverage to reduce to below 3.0 times by December 2025, from 3.5 times as of December 2023," Moody's said.

Contributions from other subsidiaries like Robi in Bangladesh and Smart in Cambodia have further strengthened Axiata’s dividend income in recent years, it noted.

Axiata’s diversified operations, which include key markets in Sri Lanka, Cambodia, Bangladesh, and the regional tower company edotco Group Sdn Bhd, are expected to help mitigate volatility in individual markets, it noted.