MARC Ratings has affirmed its AAA_IS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah, with a stable outlook. The outstanding currently stands at RM240 million.  

The rating reflects MARC Ratings’ assessment of a very high likelihood of support for Trans Thailand-Malaysia (TTM), a strategically important project involving two governments through project sponsors, Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT). PETRONAS and PTT are the national oil companies of Malaysia and Thailand.

TTM SPV is the funding vehicle of Trans Thai-Malaysia (Thailand) Ltd (TTMT) for the construction of two 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 (TTM Phase II). TTMT is a 50:50 joint venture between project sponsors, PETRONAS and PTT. 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).

PTT and TTMT are domiciled in Thailand, and TTM Phase II’s revenue is in US dollars or its Thai baht equivalent. This notwithstanding, we do not consider the rating to be constrained by Thailand’s foreign currency rating. We view that PETRONAS would have a strong strategic and reputational incentive to provide ringgit liquidity in the event of any 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 Ratings, based on publicly available information.

TTMT’s credit profile is supported by its stable and predictable cash flow, underpinned by its long-term service agreements with PTT and PETRONAS, and its cost-plus tariff structure that ensures a relatively stable profit margin. Its unit capacity reservation charge (UCRC) — used to derive its capacity reservation charges/revenue — is designed to cover its operating costs and finance service obligations, while providing adequate shareholders’ return.

TTM Phase II’s revenue held steady at US$8.6 million in 1H2022 on a higher UCRC despite a 5.6% y-o-y decline in sales volume to 100,565 mmscf from 106,555 mmscf in the previous corresponding period. In 2021, revenue was down by 8.8% y-o-y to US$17.0 million on lower UCRC. Cash flow generation during the year was adequate to meet its debt service obligation as evidenced by the annual financial service coverage ratio (AFSCR) of 1.23x as at end-2021 (2020: 1.17x), which remained above the covenanted requirement of 1.10x. UCRC, which is adjusted every June and when required if there are changes to PTT’s capacity reservations, has been set higher at US$142.34/mmscf for the June-December 2022 period. The pricing mechanism is constructed to cover debt service, operating costs and return on equity.

At TTMT’s level, revenue increased by 3.1% y-o-y to US$51.1 million while operating cash flow (CFO) was 15.0% higher at US$55.6 million in 1H2022. In the same period, TTMT returned US$22.0 million (1H2021: US$0.8 million) to shareholders in the form of dividends. This is comparable to the US$28.2 million distributed in 2019, signalling a return to normalcy for business activities after the pandemic crisis. TTMT’s borrowings reduced to US$134.0 million as at end-June 2022, leading to an improved debt-to-equity (DE) ratio of 0.6x against 0.8x the year before, and remained well within the covenanted DE ratio of 2.33x.

The stable outlook reflects our expectation that the project sponsors will remain committed to the project and that TTMT will maintain its satisfactory operating performance.

No further upgrade as the rating is already the highest on MARC Ratings’ rating scale.

Any significant weakness in TTMT’s credit metrics and/or decline in support from the project sponsors could exert pressure on the rating.