The rating reaffirmation of AAID for MHS Aviation Berhad’s (MHSA) Al-Bai Bithaman Ajil Islamic Debt Securities (BaIDS) reflects the company’s continued dominant position in the provision of aviation services to the oil and gas industry supported by its favourable outlook and strong cash flow protection to the bondholders derived from the substantial contractual revenue and monies deposited in the designated accounts. The reaffirmation of A+ID for the Junior Notes (JNs) reflects the subordinated status of the JNs in relation to the security coverage and the payment waterfall as well as the put and call option feature incorporated in the issue structure. Under the issue structure, the BaIDS are secured by a first charge and assignment over all existing service contract proceeds. Redemption of the JNs will only commence after the full redemption of the BaIDS in 2006, lending support to the rating of the BaIDS and mitigating the risk of cross default. A put and call option incorporated in the JNs’ issue structure will have the effect of accelerating the redemption of the JNs in the year 2009, the exercise date of the option.

MHSA has a competitive edge in the provision of helicopter services to the oil and gas industry, evidenced by its established business relationship with multinational companies such as ExxonMobil Exploration and Production Malaysia Inc. (EMEPMI), PETRONAS Carigali Sdn Bhd (PCSB), Sarawak Shell Berhad (SSB), Murphy Sarawak Oil Company Ltd (Murphy), Talisman Malaysia Limited (Talisman) and Carigali-Triton Operating Company Sdn Bhd (CTOC).

MHSA’s operating environment is dependent on the performance of the oil and gas industry. On the back of prevailing high oil prices, offshore exploration and production activities are expected to be more active, going forward. Entities servicing the oil and gas industry like MHSA thus directly reap benefits in tandem with increasing activities under such circumstances.

Notwithstanding the higher revenue in FY2004, MHSA reported a lower profit before tax attributable to higher operating lease expenses, a direct result of leasing expenses associated with newer helicopters to cater for the requirements of its customers as well as to replace its ageing Sikorsky S61N helicopters. Despite the decline in profit before tax, MHSA expects growing revenue coupled with stable margins contributed by the long term contracts would be able to offset the high operating lease expenses, going forward. MHSA’s cash flow position remains intact. Its DSCR of 5.95x vis-à-vis the covenanted level of 2.0x reflects sufficient protection to the bondholders.

The final redemption of the BaIDS due in September 2006 amounting to RM20.0 million is already fully backed by the balance of RM22.2 million in the designated accounts. Notwithstanding, the insurance claims receivables in excess of RM40.0 million arising from the ‘Miri incident’ and the expected proceeds from the disposal of redundant aircrafts (with an estimated sales proceeds of RM80.0 million) have been forecasted to be adequate to service the JNs’ primary and secondary notes for the next four years beginning 2007.