TTM SUKUK BERHAD - 2019

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

The rating reflects MARC’s assessment of a very high likelihood of support for this strategically important, government-to-government Trans Thailand-Malaysia (TTM) project from 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 for the second phase of the TTM project (TTM Phase II), consisting of two gas pipelines between the Malaysia-Thailand Joint Development Area 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 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 does not consider the rating to be constrained by Thailand’s sovereign rating. This assessment is based on the rating agency’s view that PETRONAS will have a strong incentive and the capability to provide ringgit liquidity should there be any transfer or 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 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. TTMT’s unit capacity reservation charge (UCRC) - used to derive its capacity reservation charges/revenue - takes into account the company’s operating costs and finance service obligations, while providing adequate shareholders’ return. MARC continues to draw comfort from such pricing mechanism that ensures adequate debt coverage and returns.

TTM Phase II’s revenue rose by 2.8% y-o-y in 2018 to US$18.6 million on higher sales volume and improved UCRC. Better business performance last year also drove TTM Phase II’s annual finance service coverage ratio higher to 1.20x, above the covenanted 1.10x. The company continued to show strong growth in 1H2019, posting a 16% y-o-y increase in revenue driven by continued growth in sales volume and pricing. TTM Phase II is thus fully on track to reach its targets for the full year and, in turn, achieve an increase in revenue of around 2.5%, combined with an operating profit margin of between 40% and 45%. MARC expects TTM Phase II’s revenue to remain stable over the next four years (2019 to 2022) in line with steady gas demand.

At the company level, TTMT recorded slightly weaker profit in 2018, dampened by higher tax charges as well as foreign exchange losses. However, its performance recovered strongly in 1H2019, boosted by steady gas sales and improved tariffs. TTMT posted revenue of US$48.5 million and pre-tax profit of US$19.8 million for 6M2019, an increase of 7.5% and 27.7% over the previous corresponding period. Meanwhile, its debt-to-equity (DE) ratio continues to improve, standing at 0.99x with borrowings of US$271.8 million as at end-June 2019 (end-June 2018: 1.16x and US$308.6 million). Barring any unforeseen circumstances, TTMT’s DE ratio is expected to improve further to around 0.97x by year 2021.

The stable outlook reflects MARC’s expectation of TTMT’s satisfactory operating performance and the project sponsors’ continued commitment to the project. Any significant weakness in TTMT’s credit metrics and/or decline in support from the project sponsors could 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.

Challenge/Risk

• Foreign exchange risk.