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 RM120 million.  

The rating continues to reflect MARC Ratings’ assessment of a very high likelihood of support for Trans Thailand-Malaysia (TTM), a strategically important project involving the 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). TTM SPV is wholly owned by TTMT, a 50:50 joint venture between 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, MARC Ratings does 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 posted revenue of US$8.8 million in 1H2023, making up 17.5% of TTMT’s overall revenue during the period. Revenue rose slightly in 1H2023 on higher UCRC (Jan-May 2023: US$142.34/mmscf; Jan-May 2022: US$141.49/mmscf) and a 6.3% rise in gas sales volume to 106,890 million standard cubic feet (mmscf). In 2022, revenue grew 9% y-o-y to US$18.6 million, with annual financial service coverage ratio (AFSCR) standing at 1.19x as at end-2022 and remaining above the covenanted requirement of 1.10x. 

We expect TTM Phase II’s operating performance to be stable due to steady demand for gas, which should enable it to maintain relatively consistent key credit metrics throughout the sukuk tenure. We also draw comfort from the UCRC pricing mechanism that is constructed to cover debt service and operating costs, while providing adequate shareholders’ return. 

At TTMT’s level, 1H2023 revenue and gas sales volume were generally stable at US$50.4 million and 202,384 mmscf (1H2022: 201,965 mmscf), although cash flow from operations (CFO) came slightly lower at US$53 million (-4.7% y-o-y) due to higher taxes paid during the period. CFO was US$112.6 million in 2022, close to 3% above forecast. Looking at the 1H2023 results and considering the higher contracted prices in 2H2023 (UCRC for June-December 2023 has been set higher at US$149.33/mmscf), we expect that the company will be able to achieve its full-year CFO target of US$109.3 million in 2023.     

TTMT’s borrowings reduced to US$95.9 million as at end-June 2023, leading to an improved debt-to-equity (DE) ratio of 0.4x against 0.5x as at end-2022, and remaining well within the covenanted DE ratio of 2.33x.  The leverage position has bettered our previous forecasts of 0.7x for 2022 and 0.5x for 2023.  

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.

There would be 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.