DRIR Management Sdn Bhd - 2007

Under this Ijarah transaction, DRIR Management Sdn. Bhd. (DRIRM), will issue RM180.0 million Class A and RM160.0 million Class B Sukuk Ijarah Medium Term Notes (MTN) under a Sukuk Ijarah MTN Programme of up to RM850.0 million, the proceeds of which will be used to acquire 12 helicopters from its related company, MHS Aviation Berhad (MHSA) and refinance borrowings previously taken to acquire four helicopters.  MARC has assigned AAIS  and  AA- IS  ratings to Class A and Class B Sukuk on the basis of the strength of the cashflows from MHSA’s long-term service contracts with the oil majors as well as short-term contracts which are more than sufficient to fund monthly Ijarah payments to DRIRM.  Payments from the oil majors will be captured in a designated account and forms part of the strong collateral backing for the Sukuk.  The Class A Sukuk is rated one notch above the corporate credit rating of the lessee, MHSA, to reflect credit enhancement afforded by the subordination of Class B Sukuk and a liquidity reserve.  The rating of Class B Sukuk reflects the corporate credit rating MARC will assign to MHSA upon the completion of its restructuring exercise which will be concluded at transaction close.  The Ijarah lease payments rank ahead of MHSA’s operational expenses in its payment waterfall under the terms of the issuance.

DRIRM is a wholly-owned subsidiary of DRIR Equities Sdn. Bhd. (DRIRE) and a sister company to MHSA incorporated for the purpose of owning and leasing (on dry basis) of aircraft/helicopters.  The proposed transaction is part of an ongoing restructuring exercise within DRIRE and its group of companies including MHSA, which entails the separation of ownership from the operation and maintenance of helicopters.  Upon completion of the acquisition from MHSA, DRIRM will become owner of a fleet of 16 aircraft and lessor whilst MHSA, an aircraft operator providing helicopter services to the oil and gas companies including Exxon Mobil Exploration and Production Malaysia Inc (EMEPMI), Petronas Carigali Sdn. Bhd. (PCSB), Sarawak Shell Berhad (SSB), Talisman Malaysia Limited and Carigali-Hess Operating Company Sdn. Bhd.  MHSA maintains long-term contacts with PCSB, EMEPMI and SSB. 

During the tenure of the transaction, predetermined monthly lease payments made by MHSA into DRIRM’s escrow account will provide a debt service cover of at least two times of DRIRM’s Sukuk obligations.  Class A Sukuk will fully amortise by end of 3.5 years while Class B Sukuk will partially amortise by end of its tenure, leaving the outstanding Class B Sukuk exposed to refinancing risk.  Nevertheless, this risk is sufficiently addressed with the strong collateral backing which includes the fleet of 16 aircraft and a debenture over the present and future assets of DRIRM and MHSA.  Additionally, in the case of default, DRIRM can exercise its option to sell the Ijarah assets to MHSA for an amount equal to the outstanding nominal value of the Sukuk Ijarah MTN plus outstanding payments under the programme. 

Non-renewal risk in relation to the long-term contacts is sufficiently mitigated by MHSA’s reliable track record, monopolistic position and established long-term client relationships.  MHSA presently provides helicopter services to the domestic oil and gas industry on long-term contracts as well as on ad hoc or spot basis.  Apart from relying on its own aircraft (pre-transaction close), MHSA also leases a total of 19 helicopters.  Of  the  19 leased  aircraft, 9  are leased  from a related entity and the remaining from third

parties.  MHSA’s long-term contracts with EMEPMI, SSB and PCSB, collectively accounting for more than 60% of total revenue, afford relatively good revenue and cash flow visibility. Post completion of its restructuring exercise, MARC expects to assign a corporate credit rating of AA- to MHSA (currently rated A+). 

Almost two thirds of MHSA’s revenue is derived from fixed monthly standing charges, mitigating potential variability in revenue arising from fluctuations in flying hours. Despite a 48% increase in revenue, profitability has been on a declining trend for past three consecutive years due to escalating aircraft lease payments. MARC expects MHSA’s financial profile to improve upon completion of the restructuring exercise with operating EBITDA ranging between 4.0% to 6.0% and debt leverage position to remain very low.  MHSA’s cash flow coverages are commensurate with its rating level, as indicated by CFO interest and CFO debt coverages of 4.80 times (FY2005: 5.44 times) and 1.62 times (FY2005: 0.94 times) respectively for FY2006.  Sensitivity analyses performed on cash flow projections reveal sensitivity to increases in operating expenses, which is mitigated to an adequate extent by adjustable components in the service contracts to compensate MHSA for increase in direct costs, such as fuel charge.