RATINGS RATIONALE

"The change in outlook reflects Axiata's higher than expected capital expenditure plans and increased shareholder returns, at a time when its business is at an inflection point - revenue growth is slowing due to the saturating voice and SMS segment, and data usage is still to gain momentum and contribute effectively to Axiata's margins," says Nidhi Dhruv, a Moody's Analyst.

The additional dividend and capex requirements are expected to weaken cash flow metrics, although Axiata's overall credit profile remains adequate for its rating level.

"While there is no imminent positive pressure on the rating, Axiata's ratings remain well positioned at the Baa2 rating level, supported by strengthening financial and operating profile, driven by an improved performance across substantially all of its cellular subsidiaries across the region, particularly that of Celcom Axiata Berhad ("Celcom") (unrated) which contributes 44% of the consolidated revenue and PT XL Axiata Tbk (Ba1/stable) which now constitutes its largest non-domestic subsidiary, representing 24% of its subscribers, 40% of revenues, and 46% of reported EBITDA (for FY2011)," adds Dhruv, also Moody's lead analyst for Axiata.

Axiata's Baa2 rating combines the: (1) company's Baseline Credit Assessment ("BCA") of 10, which is equivalent to the Baa3 level under Moody's Global Rating Scale; and (2) one-notch uplift resulting from parental support that Moody's believes the Government of Malaysia ("GoM" -- rated A3/stable) is likely to provide in a distress situation under the joint default analysis approach, given Axiata's 59.2% direct ownership by GoM-related entities, including a 39.3% stake held by Khazanah Nasional Berhad.

"Axiata's BCA is mainly underpinned by the stable cash flows generated from its wholly-owned subsidiary in Malaysia, Celcom, which enjoys a well established market position, healthy margins and returns, and is currently moderately geared," adds Dhruv.

Despite Axiata's relatively strong financial profile with consolidated adjusted debt/EBITDA of 1.9x, concerns exist regarding emerging market risk, and particularly any changes to the regulatory and political environment in the countries in which Axiata has made material investments.

While subsidiaries largely raise debt on a non-recourse basis, Moody's also remains concerned about the possibility of Axiata having to provide additional financial support to overseas subsidiaries in the event of a distress situation.

Axiata's Baa3 BCA further reflects its holding company status and reliance on cash flows up-streamed from Celcom as well as dividends received from subsidiaries to service its debt. However, this risk is partially mitigated by the holdco's long-term debt profile, including the US$300 million, 5.375% notes which mature in 2020.

The stable outlook takes into account a gradual strengthening of Axiata's operating and financial profile and higher dividend contributions from its international subsidiaries.

The rating may experience upward pressure should Axiata's fundamental credit profile continue to strengthen; in particular Moody's would like to see Axiata maintain consolidated adjusted debt/EBITDA below 2.0x and for retained cash flow to debt to remain above 35-40%.

On the other hand, downward pressure could arise should competition intensify further in any of its key markets, such that its key subsidiaries report materially declining margins or borrow aggressively to fund capex. Moody's would seek evidence of this in increasing consolidated debt/EBITDA rising above 2.5-3.0x or interest cover, as measured by (EBITDA-capex)/interest, falling below 2.5-3.0x. In addition, we would be concerned if shareholder returns were overly aggressive such that retained cash flow to debt fell below 25-30%

Furthermore, any unexpected regulatory risk, such as license renewal, in any of the markets in which it operates will also be negative for the rating. In addition, given the rating incorporates a one-notch uplift from GoM ownership, Axiata's final rating is sensitive to any changes in the support level assigned by Moody's. Any reduction in shareholding by GoM related entities or any perceived scale back in operational involvement may result in reassessment of the support level and hence impact the rating.

The methodologies used in this rating were Global Telecommunications Industry published in December 2010, and Government-Related Issuers: Methodology Update published in July 2010. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Axiata Group Berhad is one of Asia's largest regional cellular telecommunications providers with approximately 199.1 million subscribers as at 31st December 2011. Key investments include Celcom Axiata Berhad in Malaysia (wholly owned); PT XL Axiata Tbk. in Indonesia (66.6% stake); Dialog Axiata PLC in Sri Lanka (84.97% stake); Hello Axiata Company Limited in Cambodia (wholly owned); and Robi Axiata Limited in Bangladesh (70% stake), as well as a 29.2% stake in M1 Limited in Singapore and 19.96% in Idea Cellular Limited in India.

Axiata was demerged from Telekom Malaysia Berhad in April 2008. Axiata is currently 59.2% directly owned by Government of Malaysia related entities including a 39.3% stake held by Khazanah Nasional Berhad.

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Nidhi Dhruv Analyst Corporate Finance Group Moody'sInvestors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Philipp Lotter Associate Managing Director Corporate Finance Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 Releasing Office: Moody's Investors Service Singapore Pte. Ltd.50 Raffles Place #23-06 Singapore Land TowerSingapore 48623 Singapore JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (65) 6398-8308 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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