CREDIT RATING RATIONALE

PP8713/10/2007

STRUCTURED FINANCE RATINGS

NOVEMBER 2009

Analysts: RANTAU ABANG CAPITAL BERHAD

Ang Swee Ee – Rating Review
(603) 7628 1713
sweeee@ram.com.my

Elsie Tham
Summary

(603) 7628 1032
elsie@ram.com.my
RAM Ratings has reaffirmed the long- and short- term ratings of Rantau Abang
Principal Activity:
To undertake the RM10 Capital Berhad’s (“RACB” or “the Company”) RM3 billion Islamic Commercial
billion Islamic CP/IMTN and Papers/Medium-Term Notes Programme (“ICP/IMTN”) at AAA and P1
Islamic IMTN Programme
respectively. At the same time, the AAA rating of the Company’s RM7 billion
Instruments: Islamic Medium-Term Notes Programme (“IMTN”) has also been reaffirmed. Both
i) RM3 billion Islamic
Commercial long-term ratings have a stable outlook. The debt instruments will be collectively
Papers/Medium-Term known as “the Sukuk Musharakah” or “the Islamic securities”.
Notes Programme
ii) RM7 billion Islamic
Medium-Term Notes RACB, a wholly owned subsidiary of Khazanah Nasional Berhad (“Khazanah” or
Programme “the Obligor”) had been set up to undertake this RM10.0 billion Islamic ICP/IMTN
Islamic Contract: and IMTN Programme. Under the transaction, a Musharakah partnership had
Musharakah been established between Khazanah and RACB (collectively known as “the
Ratings: Musharakah Partners”), under which the Company acts as the wakeel (“Trustee”)
(i) AAA/P1 [Reaffirmed] for the Sukuk investors vis-à-vis investing in a portfolio consisting of Shariah-
(ii) AAA [Reaffirmed]
approved shares and assets owned by Khazanah (“the Portfolio”). Throughout
Rating Outlook: the tenures of the Islamic securities, the investment assets may be taken out
(i) Stable
(ii) Stable 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
Last Rating Action:
24 December 2008 Committee. Hence, the value of the portfolio (at cost) will always be at least
equivalent to the nominal value of the outstanding Sukuk.
Profit Margins:
(i) and (ii) Determined at
issuance Under the transaction, the capital returns and periodic profit payments from the
Maturity Dates: Portfolio will ultimately be serviced by Khazanah, by virtue of the Purchase
(i) To be determined at Undertaking; the Obligor will purchase the specific portfolio units from RACB at a
issuance
(ii) Varies between 15 pre-agreed price (“Exercise Price”) upon maturity or a Dissolution Event. Under
March 2011 and 25 the Musharakah venture, the Musharakah Partners are entitled to the income
September 2015
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

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.
Lead Arranger: an event. As such, the ratings of the Islamic securities reflect the credit strength
CIMB Investment Bank
Berhad
of Khazanah in its capacity as the Purchase Undertaking Obligor.

Trustee:
PB Trustee Services Berhad
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

Rantau Abang Capital Berhad 2

 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
1
a RM33.14 billion debt burden 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
Purchase
Portfolio Trustee
Undertaking
Khazanah PB Trustee
(Sukuk Trustee)

Sale Undertaking
Payment for
purchase of
portfolio 100%
units from Subsidiary
Khazanah

Issues Sukuk
Musharakah
1 special Specific
portfolio unit portfolio units
RACB Sukuk
(Wakeel) Musharakah
Proceeds from
Sukuk investors

Under this transaction,

Portfolio
a Musharakah partnership has been formed at the
Musharakah at the portfolio level
portfolio -level
Dividedbetween
into portfolio the Musharakah Partners, i.e. Khazanah and RACB. A
units
Musharakah at the Sukuk investors level

1
Includes amounts owed to related companies

Rantau Abang Capital Berhad 3

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

Rantau Abang Capital Berhad 4

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

Rantau Abang Capital Berhad 5


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.

Rantau Abang Capital Berhad 6


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

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
2
PLUS Infrastructure 63.87
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.

Rantau Abang Capital Berhad 7

 3
billion as at end-FY Dec 2008 (end-May 2008: RM88.2 billion) while its net worth
4
had dwindled to RM35.61 billion (end-May 2008: RM53.1 billion) . Overall
shareholders’ returns from its listed portfolio contracted 35.7% in 2008, broadly in
5
line with the 36.2% 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 -
6
registering a 4.9% growth in the first 7 months of 2008 , 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

Khazanah's Total dividends Khazanah’s
Company Dividend policy shareholding for FY Dec 2008 portion
(%) (RM million) (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.

Rantau Abang Capital Berhad 8

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
7
billion in 2004 . 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

Rantau Abang Capital Berhad 9

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.

8
The Government has earmarked RM6.83 billion 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%
9
of the 5-year target of RM47 billion under the 9MP . 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
10
for fiscal 2008 . 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
11
USD16.8 billion . 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

Rantau Abang Capital Berhad 10

 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-
12
December 2008: 1.1 times) .

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

Rantau Abang Capital Berhad 11

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

Company Date of Acquired RM Business Country of
acquisition Interest Operations
(%)
million
Infrastructure Mar-07 9.87% 630 Financial India
Development Intermediary
C ompany (IDFC ) for
Infrastructure
Parkway Holdings May-08 16.4% 1230 Healthcare Singapore
Singapore

AC R Retakaful May-08 40% 1050 Insurance UAE

Holdings
KC S Green Aug-08 JV 557 Waste-energy C hina
Energy
International
(Group)
Investments C o.
Ltd
Khazanah India Sep-08 100% 2 Investment India
Advisors Private Advisory
Limited Services
Jadwa Oct-08 10% 266 Fund Saudi Arabia
Investment Management
Small Bone Jul-09 23% 88 Medical USA
Innovations
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.

Rantau Abang Capital Berhad 12


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.

Rantau Abang Capital Berhad 13

Table 7: Sources of Khazanah’s income
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
267.66 12.89 4,525.76 63.64 877.12 14.31
divestments
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

Highly leveraged balance sheet

Khazanah’s balance sheet had a reasonably high level of borrowings, with a
13
RM33.14 billion debt burden 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.

Rantau Abang Capital Berhad 14

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:

Rantau Abang Capital Berhad 15

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.

Rantau Abang Capital Berhad 16


Corporate Information – Rantau Abang Capital Berhad

Date of Incorporation: 30 September 2004

Commencement of N/A
Business:

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 Cumulative Total

(RM) (RM)
2004 Issued and paid up 2 2

Rantau Abang Capital Berhad 17

FINANCIAL SUMMARY
Khazanah Nasional Berhad - Company
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
T rade 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-T erm 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
T rade Payables 0.00 0.00 0.00 0.00 0.00
T axation 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-T erm 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

Rantau Abang Capital Berhad 18

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
T axation (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)
T ax 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

Rantau Abang Capital Berhad 19

FINANCIAL RATIOS
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

Rantau Abang Capital Berhad 20

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

Rantau Abang Capital Berhad 21

 CREDIT RATING DEFINITIONS
Issue Ratings - Partnership-Based Sukuk

An Issue Rating for a partnership-based sukuk is RAM Ratings' current opinion on the creditworthiness of a particular
partnership-based sukuk. It reflects the overall capacity and willingness of an issuer to meet the payment of capital and
expected returns on a full and timely basis, taking into account the expressed terms and conditions of the investment
contract. 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.

Long-Term Ratings

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

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

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

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

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

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

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

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

Short-Term Ratings

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

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

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

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

D A sukuk rated D is either currently not meeting or will not meet the payment of capital and expected returns. The D
rating may also reflect a distressed exchange, the filing of bankruptcy and/or other actions pertaining to the issuer
that 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 that
the issue ranks at the higher end of its generic rating category; the subscript 2 indicates a mid-ranking; and the subscript 3 indicates
that the issue ranks at the lower end of its generic rating category. In addition, RAM Ratings applies the suffixes (bg) or (s) to ratings
which have been enhanced by a bank guarantee or other supports, respectively.

Rantau Abang Capital Berhad 22

 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

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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.

Rantau Abang Capital Berhad 23