TTM SUKUK BERHAD - 2015

MARC has affirmed its AAA_IS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook.

TTM SPV is the funding vehicle of its parent Trans Thai-Malaysia (Thailand) Ltd (TTMT) for Phase II of the Trans Thailand-Malaysia (TTM) project (TTM Phase II). TTMT is an equal joint-venture company of Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT), both of which are the national oil companies of Malaysia and Thailand respectively.

The affirmed rating reflects the stable and predictable cash flows generated under long-term service agreements with creditworthy project sponsors and offtakers, PETRONAS and PTT, and the importance of the TTM Phase II project in supplying natural gas to Thailand since January 2009 and Malaysia since April 2015. MARC continues to incorporate a support uplift for the rating from project sponsors, in particular PETRONAS, taking into account the national oil company’s financial strength. PTT is a Thai state-controlled multinational oil and gas company with a fairly integrated business model and solid operational track record. MARC maintains a senior unsecured rating of AAA/Stable on PETRONAS, based on available public information. In addition, MARC considers PETRONAS’ strong strategic and reputational incentive to provide ringgit liquidity to meet financial obligations of TTM SPV should transfer and convertibility issues arise, given that PTT and TTMT are domiciled in Thailand and project revenues are denominated in US dollars or the Thai baht equivalent.

MARC notes that TTMT has achieved a good operating track record since commencing Phase I operations in 2006; its standalone credit profile is reflected by its steady cash flow generation ability through long-term contracts ending in 2045. Phase II’s project revenue, which is derived by multiplying the fixed capacity reservation with the unit capacity reservation charge (UCRC), considers the operating costs and finance service obligations of TTM SPV as well as an adequate return to shareholders. TTMT’s overall creditworthiness moderates the credit linkages arising from cross-acceleration and cross-default provisions between the sukuk and the syndicated bank loan taken to finance Phase I.

At the company level, TTMT reported a slight improvement in revenue to US$113.2 million (2013: US$112.0 million) and a sharp increase in net profit to US$50.8 million (2013: US$39.9 million). The lower net profit in 2013 was due to higher accrual of tax expenses upon the adoption of a new accounting standard in that year. TTMT continues to generate healthy operating profit margins while cash flow from operations rose to US$122.4 million in 2014 (2013: US$116.1 million). The company registered stronger free cash flow of US$84.1 million (2013: US$76.7 million) on lower dividend payments of US$28.2 million (2013: US$37.3 million). MARC notes that as TTMT steadily pares down its borrowings, its leverage position continues to improve. MARC expects the gearing to decline further on the serial amortisation of the sukuk programme.

TTM Phase II’s revenue contribution of THB803.8 million to TTMT in 2014 accounted for 20.1% of the overall revenue. MARC notes that TTM Phase II’s UCRC was revised upwards in 2014 and 1H2015 to US$145.22 per million standard cubic feet (mmscf) and US$143.10 per mmscf respectively (2013: US$123.50 per mmscf). This was done to provide adequate cash flows to meet TTM SPV’s financial obligations. TTM SPV’s upcoming profit payment and next principal repayment of RM50 milllion is due in May 2016 and November 2016 respectively. The company has deposited US$31.8 million into the finance service reserve account as at end-October 2015.

The stable outlook reflects the project’s good operating track record and TTMT’s sound credit metrics. Any change in the outlook would be primarily driven by a reduction in TTM’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
• Project’s strategic importance to Thailand and Malaysia.

Challenges/Risks

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