TTM Sukuk Bhd - 2010

MARC has assigned a rating of AAAIS to TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah. The rating outlook is stable.

The transaction structure involves TTM SPV as a funding vehicle issuing 5- to 15-year Sukuk, the proceeds of which will be loaned to parent Trans Thai-Malaysia (Thailand) Ltd (TTMT). TTM SPV is a special purpose entity set up for the sole purpose of issuing the Sukuk to raise funding for the capital costs and working capital requirements for the second phase of the Trans Thailand-Malaysia gas pipeline and separation project (TTM Project Phase II). A 50:50 joint venture of Malaysia's national oil company Petroliam Nasional Berhad (Petronas) and Thailand's PTT Public Company Ltd (PTT), TTMT is the owner and operator of the TTM Project Phase II.

The rating on the Sukuk equates to TTMT's senior unsecured issuer rating with the benefit of uplift from shareholders' support. MARC notes TTMT's payment sources for debt taken to fund the first and second phases of the TTM Project are linked to the respective revenue streams generated by the operating assets financed. Nonetheless, the presence of cross-acceleration and cross-default provisions in the proposed Sukuk and existing Phase I debt as well as TTMT-level financial covenants imply that the credit risk of the Sukuk will be driven more by TTMT's overall creditworthiness than the performance of the Phase II pipelines.

The rating on the Sukuk therefore incorporates not only MARC's expectation of highly stable and predictable cash flow coverage metrics for TTM Project Phase II, but also TTMT's low overall financial and operating risk profile in addition to its extremely strong shareholder support. TTMT's shareholders have demonstrated their capacity and willingness to support TTMT through direct bridging loans and equity injections. MARC views the TTM Project as strategic to the two national oil companies, and expects shareholders' commitment to TTMT to remain strong. The TTM Project currently supplies 17% of Peninsular Malaysia's natural gas needs and 18% of Thailand's needs.

TTM Project Phase II has become fully operational since June 2010 with the second of two pipelines commencing commercial operations, thus eliminating construction risk. The first phase of the project was completed in 2006 and has been generating revenues that are adequate to cover operating expenses and fulfil all financial obligations.

Under the Sukuk transaction structure, all Phase II revenues of TTMT are to be transferred to designated operating accounts and applied to payments, including intercompany loan obligations to TTM SPV, according to a payment waterfall. The stability and predictability of TTMT's Phase II revenue stream is afforded by contractual monthly capacity reservation charges that are paid regardless of delivered volumes and PTT's very strong creditworthiness in its capacity as sole offtaker. However, TTMT’s revenues are denominated in USD or Thai baht equivalent, exposing the transaction to foreign exchange risk. TTMT can only make restricted payments only when the Finance Service Reserve Account (FSRA) is fully funded and the Phase II Annual Finance Service Coverage Ratio (AFSCR) exceeds 1.1 times.

The forecast base case cash flows project an average AFSCR of 4.61 times for the five-year period prior to 2015, declining to 1.27 times when principal repayments on the Sukuk commence. MARC believes that Sukukholders are well protected against cash shortfalls by the project's robust cash flow generation and the FSRA, which is sized to cover six months of profit payments and 50% of the next principal payment. Any draw on the FSRA requires prompt replenishment. Additionally, TTMT is required to observe a gearing cap of 70:30, measured by the ratio of debt to shareholders' funds, including preferred equity and subordinated shareholders' loans, which will mitigate the risk of unfavourable changes to TTMT's capital structure.

The stable rating outlook is broadly supported by MARC's current assessment of the political and macro-economic factors influencing Thailand’s sovereign risk. MARC believes the credit profile of PTT as the offtaker to be highly correlated with Thailand's sovereign risk owing to its majority ownership by the Thai government, importance to the Thai economy as the largest domestic oil and gas company, and exposure to Thailand's economic conditions as a result of its predominantly domestic revenue base. Accordingly, a deterioration in the Thai economic environment would be of concern to MARC in light of its potential implications for PTT's credit standing and the assigned rating.

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