TTM SUKUK BERHAD - 2017

MARC has affirmed its AAA_IS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. The outstanding sukuk amounts to RM450 million as at February 2018.

TTM SPV is a funding vehicle for the second phase of the Trans Thailand-Malaysia (TTM) project, consisting of two gas pipelines between the Malaysia-Thailand Joint Development Area (JDA) and the industrial city of Rayong in Thailand. TTM SPV is wholly owned by Trans Thai-Malaysia (Thailand) Ltd (TTMT), a 50:50 joint-venture company between Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT), the national oil companies of Malaysia and Thailand respectively.

The affirmed rating reflects MARC’s assessment of a very high likelihood of support from project sponsors, PETRONAS and PTT, based on their strategic and vested interests to ensure the success of the government-to-government TTM project. The rating also considers the credit linkages in the form of cross-acceleration and cross-default provisions between the rated sukuk and the term loan taken to finance the first phase of the TTM project (TTM Phase I) of which PETRONAS is the main offtaker.

The rating is not constrained by Thailand’s foreign currency rating, notwithstanding the fact that major offtaker of the second phase (TTM Phase II), PTT and project company TTMT are domiciled in Thailand. The project revenue of TTM Phase II is denominated in US dollars or Thai baht equivalent. The assessment is based on MARC’s view that PETRONAS has a strong incentive to provide ringgit liquidity in the event of transfer and convertibility issues arising from any foreign exchange restrictions imposed by the Thai government. PETRONAS has a senior unsecured rating of AAA/Stable from MARC, based on publicly available information.

The project’s standalone credit profile is supported by the stable and predictable nature of project cash flow on the back of a cost-plus tariff structure under the long-term service agreements with PTT and PETRONAS. TTMT’s availability-based capacity revenue is calculated based on unit capacity reservation charge (UCRC) that incorporates operating costs, finance service obligations in addition to providing adequate shareholders’ return. TTM Phase II’s revenue continued to decline in 1H2017 and 2016 on the back of lower UCRC and gas sales volumes. Despite the revenue decline, TTM Phase II’s operating profit margin remained stable at around 64.8% and 63.3% in 1H2017 and 2016 respectively (1H2016: 64.8%; 2015: 63.7%). Cash flow generation remained adequate to meet its debt service with an annual finance service coverage ratio (AFSCR) of 1.18 times in 2016 vis-à-vis the covenanted requirement of 1.10 times.

At the company level, TTMT posted lower revenue of US$100.0 million in 2016. Coupled with higher administrative expenses and foreign exchange losses, TTMT’s pre-tax profit declined to US$30.3 million (2015: US$51.7 million). TTMT’s cash flow from operations (CFO) improved to US$102.0 million on account of lower capital requirements which led to a higher free cash flow of US$48.6 million (2015: US$43.4 million).

In 2016, TTM Phase I underwent a capital reduction exercise and a refinancing of its existing US$ term loan. The US$66.4 million (equivalent to THB2.65 billion) capital reduction was paid out to shareholders on July 28, 2016. As a result, TTMT’s ending cash balance depleted to US$48.1 million (2015: US$113.3 million). The rating agency had opined that the credit profile of TTM SPV would remain unchanged as Phase II’s project accounts and cash flow coverages were not impacted by these exercises. As at end-2016, TTMT’s outstanding borrowings stood at US$306.5 million (2015: US$344.4 million). Total shareholders’ funds declined to US$263.7 million due to the aforementioned capital reduction exercise. This led to a weakening in its leverage ratio to 1.16 times compared to 1.04 times in 2015 but well within the covenanted debt-to equity (DE) ratio of 2.33 times.

The stable outlook reflects MARC’s expectation of TTMT’s satisfactory operating performance and the project sponsors’ continued commitment to the project. Any deterioration of TTMT’s credit metrics and/or TTM project’s strategic importance to the project sponsors will exert pressure on the rating.

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.