CREDIT ANALYSIS REPORT

TTM Sukuk Bhd - 2014

Report ID 4981 Popularity 1515 views 32 downloads 
Report Date Feb 2015 Product  
Company / Issuer TTM Sukuk Berhad Sector Infrastructure & Utilities - Oil & Gas
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its AAAIS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. TTM SPV is the funding vehicle of Trans Thai-Malaysia (Thailand) Ltd (TTMT) for the construction of two additional gas pipelines to transport natural gas from the Malaysia-Thailand Joint Development Area (JDA) in the Gulf of Thailand to the industrial city of Rayong in Thailand. TTMT is a 50:50 joint venture between project sponsors, the national oil companies of Malaysia and Thailand, namely Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT).

The affirmed rating incorporates a very high probability of support for the Trans Thailand-Malaysia (TTM) project from creditworthy project sponsors, in particular PETRONAS on which MARC maintains a senior unsecured rating of AAA/Stable based on available public information. MARC assumes the support from the project sponsors to ensure the success of the TTM project is based primarily on their vested interests. The gas pipeline construction, which was completed in June 2010, is the second phase of the TTM project comprising a 667km gas transmission pipeline system and a gas separation plant to meet the energy requirements in both countries. The rating also considers the credit linkages in the form of cross-acceleration and cross-default provisions between the sukuk and the syndicated bank loan taken to finance the first phase of the project for which PETRONAS is the co-offtaker. The rating is not constrained by Thailand’s foreign currency rating notwithstanding that the sole offtaker of the second phase, PTT and project company TTMT are domiciled in Thailand and the project revenues are denominated in US dollars or the Thai baht equivalent. This assessment is based on PETRONAS’ strong incentive to provide ringgit liquidity in the event of foreign exchange restrictions imposed by the Thai government.

TTMT’s standalone credit quality is underpinned by stable and predictable operating cash flows (CFO) from long-term services agreements ending in 2045. In addition, TTMT’s availability-based capacity revenue is calculated based on unit capacity reservation charge (UCRC) that takes into account operating costs and finance service obligations, as well as adequate return to shareholders. TTMT’s credit assessment also considers the company’s sound operational track record and PTT’s strong credit profile, which is largely derived from its governing role in Thailand’s oil and gas industry.

TTMT continued to earn full capacity revenues for Phase II, amounting to THB444.0 million and THB835.3 million in 1H2014 and 2013 respectively (2012: THB874.9 million). The lower revenue in 2013 was attributed to a lower UCRC which is adjusted annually based on TTMT’s operating budget. Nonetheless, Phase II provided adequate cash flows for TTM SPV to meet its financial obligations, represented by the strong annual finance service cover ratio (AFSCR) of 2.99 times (x) and 2.85x for 1H2014 and 2013 respectively, well above the covenanted AFSCR of 1.1x. In addition, TTM SPV has met the finance service reserve account (FSRA) build-up requirement to deposit half of the upcoming principal payment of RM50 million one year prior to the repayment date in November 2015. MARC notes that the UCRC was adjusted upwards in 2014 to allow adequate CFO generation in tandem with the increase in Phase II’s finance service amount.

At the company level, TTMT’s stable operating profit margins, robust CFO generation, ample liquidity and modest leverage continue to be positive credit drivers. The lower earnings TTMT posted in 2013 were mainly attributed to the new accounting standard adopted for deferred tax. For 2013, net profit was THB1.2 billion (US$38.1 million) on revenue of THB4.6 billion (US$150.9 million) (2012: THB1.9 billion (US$61.6 million); THB4.6 billion (US$146.8 million)). While the new accounting standard has had no cash flow impact due to TTMT’s deferred tax assets of THB729.0 million (US$22.2 million) as at end-2013, debt-to-equity (DE) ratio stood higher at 1.61x. This was due to restating the opening balance of the company’s shareholders’ funds at THB8.8 billion from THB12.8 billion previously. Nevertheless, TTMT retains adequate headroom on the DE covenant of 2.33x. In addition, MARC expects the project sponsors to continue providing timely equity support if required as had been demonstrated in the past.

Any change in the sukuk rating would be primarily driven by a material deterioration in TTMT’s credit metrics and/or a reduction in the TTM project’s strategic importance to the project sponsors.

Major Rating Factors

Strengths

  • Highly predictable and stable cash flow over the sukuk tenure;
  • Very strong creditworthiness of ultimate project owners; and
  • Strategic importance to Thailand and Malaysia.

Challenges/Risks

  • Foreign exchange risk; and
  • Sensitivity to political developments in Thailand and Malaysia.
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