Haluan Gigih Sdn Bhd - Mar 2010

MARC has assigned a rating of AAIS on Haluan Gigih Sdn Bhd’s (HGSB) proposed Sukuk Musyarakah Medium Term Note (IMTN) Programme of up to RM240.0 million. Proceeds will be used to fund the RM157.5 million acquisitions of two office buildings, with the balance to fund inter-company advances to its parent, Alloy Consolidated Sdn Bhd (ACSB). The assigned rating reflects MARC's assessment of HGSB's ability to provide full and timely payment of its debt service obligations solely from operating cash flows of identified toll road operation and maintenance businesses of related entities, and two office buildings. The rating outlook is stable.

The methodology MARC has applied in rating the IMTNs to be issued under the Shariah principle of Musyarakah has features of the rating approach for whole business securitisation. MARC considers the transaction as having the characteristics of both conventional asset securitisation and corporate debt. The repayment source for the IMTNs are future cash flows to be generated by identified toll road operation and maintenance businesses of entities related to HGSB and two issuer-owned office buildings. MARC's rating considers the protective covenants, controls and debt service reserves embedded in the transaction structure. The rating also considers the inherent business risks associated with assigned cash flows, i.e. lower property occupancy levels, and reduced traffic growth and revenues, as reflected by HGSB's projected debt service coverage ratios under stressed scenarios.

HGSB is a special purpose vehicle wholly-owned by ACSB, a holding company with principal activities in highway and road construction in addition to toll road operation and maintenance. HGSB is proposing to acquire two commercial office buildings known as MTD Building and Shell Building from wholly-owned subsidiaries of MTD Capital Bhd (MTD Capital), of which ACSB is a major shareholder. In addition to the rental stream from the office buildings, the debt servicing and repayment capacity of HGSB will also be derived from an assignment of net cash flows from Alloy Toll Management Sdn Bhd (ATM) and Alloy Maintenance Engineering Sdn Bhd (AME). Wholly-owned subsidiaries of ACSB, ATM and AME will assign all their revenues, fees and receivables to HGSB under the transaction structure. ATM collects tolls on the KL-Karak Expressway, East Coast Expressway and East West Link Expressway under a long-term toll operation contract with MTD Prime Sdn Bhd (MTD Prime) and Metramac Corporation Sdn Bhd (Metramac). AME, meanwhile, undertakes the maintenance of the KL-Karak Expressway and the East Coast Expressway 1 under a highway operation and maintenance contract with MTD Prime.

ATM and AME are required to remain debt-free throughout the transaction tenure to mitigate the risk of competing claims on ATM’s and AME’s assigned cash flow. MARC views the assigned cash flows of ATM and AME as a primary credit strength of the transaction given their established pattern of reliable earnings generation, and the strong credit quality of their related counterparties, namely MTD Prime, Metramac and MTD Capital. MTD Capital owns 100% of MTD InfraPerdana Berhad (rated AAID /stable by MARC), which in turns owns 100% of MTD Prime and Metramac.

The MTD Building, a 14-storey office building located in suburban Kuala Lumpur, is almost fully occupied and is currently the corporate office of MTD Capital Group. MTD Building's rental stream will be supported by a 10-year lease agreement with MTD Properties Sdn Bhd (MTD Properties) commencing in 2010. The option to renew the lease for another five years will be given to MTD Properties. Shell Building is a 12-storey office building located within the fringe of Kuala Lumpur and is currently fully occupied by Shell Malaysia Trading Sdn Bhd (Shell Trading), part of the Royal Dutch Shell plc group of companies. Shell Building faces some measure of tenancy renewal risk with its lease expiring on September 15, 2012. However, MARC believes that this risk is somewhat mitigated by the building’s location and quality and the transaction's ability to withstand a fairly high stress scenario pertaining to occupancy.

Base case financial projections indicate a minimum debt service coverage ratio (DSCR) of 1.68 times (x) and an average DSCR of 1.77x with respect to the IMTNs. MARC also evaluated the financial impact of several stress case scenarios. Under MARC's combined stress case which imposes zero rental income from Shell Building in 2014, lower major maintenance revenue in 2014 and 2017 and a 20% reduction in MTD Building’s projected rental revenue throughout the IMTN Programme, the minimum DSCR is 1.31x and average DSCR is 1.48x. MARC views the base case and stress case DSCRs to be consistent with the 'AA' rating level. Under the transaction structure, satisfactory liquidity buffer is provided where HGSB is required to fund a Finance Service Reserve Account (FSRA) progressively six months before and be fully funded three months ahead of any scheduled IMTN profit and principal repayments.

Changes in any of the factors supporting the rating, i.e. the continuity and stability of its toll road operation and maintenance businesses, expected cash flow generation and cash flow coverages, and decline in the creditworthiness of principal counterparties may lead to changes in the rating.

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