SINGAPORE (THE BUSINESS TIMES) – Moodys Investors Service has assigned a first-time B3 corporate family rating (CFR) to Grab Holdings to reflect the firm’s leading position in key regional markets as well as uncertainties around its ability to achieve sustained profits.
In a research note on Monday night (Jan 4), the credit ratings agency said it does not expect Grab’s earnings before interest, taxes, depreciation, and amortisation (Ebitda) to break even on a consolidated basis before 2023, as growth plans for its financial services business will “temper overall profitability” over the next two to three years.
Cash will be needed to ramp up new businesses as well as potential acquisitions to grow this segment, which offers cashless payment solutions, and products and services such as insurance, lending and wealth management, said the agency.
Somewhat offsetting these risks is the “substantial” amount of cash and deposits on Grab’s balance sheet – around $3.2 billion of unrestricted cash and cash equivalents at Sept 30, 2020 – which Moody’s expects will be sufficient to cover negative operating cash flow, capital spending at its transport and food delivery businesses and scheduled debt maturities over at least the next two to three years.
“The B3 CFR reflects Grab’s leading position in key ride-hailing and food delivery markets across South-east Asia, good long-term growth prospects, commitment to exercising cost discipline, as well as its substantial cash holdings which should be sufficient to fund sizeable operating losses and cash burn over at least the next two to three years,” said Moody’s analyst Stephanie Cheong.
At the same time, the rating reflects uncertainties around Grab’s ability to achieve sustained profitability as low switching costs for customers, drivers and merchants, as well as higher competitive intensity from existing and new players, could disrupt the company’s path to profitability, Ms Cheong said.
The company faces strong competition from rival Gojek in Indonesia, the company’s largest market based on gross revenue, and also from pure-play food delivery companies such as Delivery Hero (Foodpanda), Deliveroo and Foody in South-east Asia’s highly fragmented and competitive food delivery market.
According to Moody’s, Grab’s rating is also constrained by investment and execution risks associated with the firm’s nascent digital financial services business.
In addition, the firm’s B3 CFR also considers its “complex” corporate structure and the redemption risk associated with its convertible redeemable preference shares (CRPS), which can be put back to the company after June 2023.
While Grab has ultimate control of partially-owned subsidiaries, its multi-jurisdictional group structure may inhibit timely movement of cash among group entities, said the agency. It expects Grab’s organisational structure to remain complex as it expands across the region.
In terms of environmental, social and governance factors, Moody’s considered social risks arising from the societal impact of its disruptive technology, including controversies related to pushback from traditional taxi companies, worker strikes and personal data breaches, and as a result, increased regulatory scrutiny on the sector – all of which could impact the firm’s reputation and disrupt its business.
Grab’s B3 CFR could be downgraded if it has insufficient liquidity to fund its operations and investments over at least the next two to three years; its cash burn does not “moderate significantly as expected” over the next 12-18 months; there is meaningful cash drain to fund new ventures including its digital financial services business; increased competition or new regulatory standards weaken the company’s market position, cash flow or earnings relative to Moody’s current expectations; or Grab is unable to extend the redemption date of its CRPS at least 12-18 months in advance of June 2023.
The agency also assigned a B3 rating to Grab and its subsidiary Grab Technology’s proposed senior secured term loan, where proceeds from the loan will be used for general corporate purposes.
The proposed loan will constitute the majority of Grab’s debt and is therefore rated in line with the firm’s B3 CFR.
The outlook is stable for now, which reflects Moody’s expectation that Grab will maintain a large cash buffer relative to its operating cash needs over at least the next two to three years, and that cash burn will moderate significantly in 2021. The agency expects Grab to adopt a prudent funding approach towards acquisitions or investments.
“Despite sizable losses historically, Grab has demonstrated its ability to generate earnings in ride hailing markets where it has a leading position. It has also committed to exercising cost discipline, which should support profitability going forward,” said the agency.
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