Singapore’s state-owned fund Temasek Holdings Limited and Saudi Arabia’s sovereign wealth fund Public Investment Fund (PIF) will maintain advantage in intrinsic credit strength among rated peers, Moody’s Ratings said Thursday.
The rating agency said in a report that Temasek and PIF display stronger intrinsic credit quality, underpinned by superior credit metrics, excellent liquidity and diversified investment portfolios.
It said Temasek’s excellent investment portfolio transparency provides greater visibility over market values and dividend income from investments, while geographic diversity reduces its exposure to localized economic downturns.
According to Moody’s, Temasek and PIF have the strongest credit metrics among the rated companies as both companies have very low estimated market value-based leverage and high interest coverage.
It noted Temasek is the only company that is in a net cash position.
Its high quality investment portfolio provides strong, recurring cash flow in the form of dividend income that also supports its robust credit standing, said Moody’s.
Meanwhile, PIF’s credit standing is bolstered by its excellent liquidity and low debt balance, with the fund’s capital primarily sourced from asset transfers, growth in retained earnings, debt borrowings, and financial contributions from the government of Saudi Arabia.
Malaysian sovereign wealth fund Khazanah Nasional Berhad, China state-owned capital investment companies Shenzhen Investment Holdings Co., Ltd. (SIHC), Shandong Guohui Investment Holding Group Co., Ltd., State Development & Investment Corp., Ltd. (SDIC) and Beijing State-owned Capital Op and Management Co., Ltd. (BSCOMC), on the other hand, exhibit weak liquidity among the eight rated companies.
“These five companies have insufficient internal cash sources to meet their cash needs over the next 12-18 months primarily due to large short-term debt that tends to get rolled over each year,” Moody’s said.
Nonetheless, it noted liquidity risk for these companies is mitigated by a demonstrated track record of strong funding access, including from state-owned banks in their respective countries.
It said these companies have also demonstrated their access to domestic and international capital markets during periods of market volatility.
And they can choose to operate with lower cash balances given their strong access to funding, said Moody’s.
Moody’s also highlighted that Khazanah’s intrinsic credit quality is supported by stable earnings from its key investee companies, which have leading market positions and strong business profiles in Malaysia.
Furthermore, since adopting an active investment approach since 2004, Khazanah has grown the net asset value of its portfolio at a compound annual growth rate of around 5 percent.
It has achieved this growth while maintaining prudent financial policies which include a public leverage
target.
Moody’s expects Khazanah’s market-value-based leverage to remain at 30 percent to 35 percent over the next few years.
According to Moody’s, Chinese state-owned investment holding companies (IHCs) have public policy mandates set by their respective central, provincial or municipal governments, which can affect their operations and financial risk profiles.
For example, SIHC is mandated by the Shenzhen government to develop high-tech industrial parks, hold state-owned assets and provide public and social welfare services.
Furthermore, SIHC may be tasked to take on ad hoc investments which require capital contributions to government led funds, which may expose the company to execution risk.
Moody’s also highlighted that two Chinese state-owned companies – Shandong Guohui and SDIC, have concentrated dividend sources, which can lead to volatility in their dividend receipts each year.
The companies recorded low interest coverage of 0.9 times and 1.7 times in 2023, respectively, as a result of lower dividend receipts from their key portfolio companies during the year.
However, interest coverage for Shandong Guohui and SDIC was around 2 times and 3.5 times, respectively, in 2022 because of higher dividends received, said Moody’s.
Among the rated companies, Moody’s said Khazanah and PIF have the greatest portion of publicly listed investments , at more than 50 percent.
It noted state-owned IHCs with a higher proportion of listed assets such as Khazanah and PIF can have greater capital-raising ability.
This includes access to equity capital in the form of secondary offerings and rights issuances at listed investee companies.
Meanwhile, among the rated state-owned IHCs, Temasek has the most geographically diversified investment portfolio, with domestic assets accounting for around 27 percent of the total portfolio asset value as of March 2024, according to Moody’s.
China state-owned IHCs’ investments, on the other hand, are predominantly domestic.
Moody’s said Temasek operates on commercial principles with an aim to deliver sustainable returns over the long term.
As a result, investment decisions are not limited by geographic or sectoral constraints.
Furthermore, Temasek’s domestic investments tend to be blue-chip companies with internationally diversified operations.
These include PSA International Pte. Ltd. (Aa1 stable), one of the world’s largest port operators by throughput, and Singapore Telecommunications Limited, a leading integrated communications services provider.
It is noted that the Chinese state-owned IHCs that Moody’s rate are typically mandated to undertake policy roles for the country or a particular province or municipality, and as a result, they are exposed to concentration risk in China.
Furthermore, local state-owned enterprises (SOEs) mandated by municipal or provincial governments tend to have a greater geographic concentration toward a specific region.
These include SIHC and Shandong Guohui, which focus on managing state-owned assets on behalf of their respective municipal and provincial governments, said Moody’s.
Moody’s noted concentration risk can also extend to specific sectors.
For example, China Jianyin Investment Limited, which is mandated to bail out and restructure underperforming companies in the financial services sector, is highly exposed to systemic risk in the financial services industry.
Meanwhile, companies with broader sector diversification such as SDIC and BSCOMC, which are diversified across more than 10 sectors, have relatively lower exposure to sector-specific risks for their investment portfolios.
According to Moody’s, the 11 government-owned IHCs that they rate globally are primarily located in Asia and the Middle East and together they controlled around $2 trillion of assets globally as of 2023.
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