YTLP - debt, leverage and natural hedging

Summary: High gearing for foreign denominated assets reduced FOREX risk through natural hedging of forex risk, reduces overall asset portfolio risk.

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YTLP has approximately RM23 B of debt as at June 2012 (up front RM21B) in June 2011. Bulk of this increase is due to capital spending at Wessex Water and Yes of approximately RM1.6B and RM897M respectively.

The Wessex capital spending is due to their  £1B investment plan between 2010-2015. I am not sure what's the ROI for these investment given the declining segmental profit since 2010.

Debt as natural hedge in oversea investment
Anyway, the bulk of the borrowings lies in Power Seraya and Wessex Water. These borrowing represent approximately RM16B or 69% of total borrowing as at June 2012.

These debt represent 77% and 91% of asset in Power Seraya and Wessex Water.

As highlighted in the past by the management, YTL seek to hedge its FX exposure through foreign denominated borrowing that correspond to the underlying asset currency.

Hence, I think its FX borrowing (at rather low effective rate) acts as a efficient risk management strategy and given the secured nature of the underlying cashflow - investors should not be too worry about its level of gearing.

Illustration

Currently GBP/MYR is approximately 4.8, it's approximately 6.2 back in 2009 - representing a weakening of 22.5% over 4 years. 

Assets held under Wessex water was RM11.5B as at June 2011 or approximately GBP2.4B.

GBP2.4B @6.2 = RM14.9B

Representing a devaluation of approximately RM3.35B in asset value.

HOWEVER - due to "natural hedging" in the form of GBP denominated debt, the debt has also devalued by 22.5% - reducing the devaluation loss to approximately RM336M.

Saved the shareholder RM3B due to this "high gearing".

Note: Actual figure will differ - but concept is accurate.