MARC has assigned initial ratings of AA-IS and MARC-1ID/AA-ID to Tanjung Langsat Port Sdn Bhd’s (TLP) RM250.0 million Sukuk Musyarakah (Sukuk Musyarakah) and up to RM135.0 million Musyarakah Commercial Papers/Musyarakah Medium Term Notes Programme (MCP/MMTN), respectively. The ratings carry a stable outlook. The proceeds from the proposed issuances will be used mainly to repay existing borrowings, and to finance expansion of the Port of Tanjung Langsat (port) and construction of storage tanks.   

The ratings reflect the strong projected demand for the port’s specialized non-edible liquid bulk facilities based on its proximity to petrochemical plants located in the south of Peninsular Malaysia and its strategic location along major international shipping routes. The port appears well positioned to capture spillover demand from port users in neighbouring Singapore in addition to local demand. The port’s cash flow visibility is supported by a Deed of Commitment between Trafigura Pte Ltd (Trafigura) and TLP in relation to the lease of a tank terminal complex which provides some measure of revenue certainty over a seven-year period. Throughput and wharfage revenues from the lease of the tank terminal complex to Trafigura are expected to account for 38.63% on average of TLP’s projected revenue during the first three years of rated facilities’ tenure. TLP faces modest construction risk in relation to its planned infrastructure works given the low level of construction complexity called for as well as the completion of the storage tanks.

The ratings are nevertheless constrained by TLP’s modest capitalization and limited financial flexibility, the possibility of higher than expected capital expenditures and TLP’s unproven track record in handling and operating port facilities.  

Incorporated in 1995, TLP is wholly owned by Johor Corporation (JCorp). TLP first commenced operations in 2003 and is in the midst of upgrading its infrastructure to accommodate larger vessels and constructing centralized tankage facilities for petroleum and petrochemical products. The port has a total area of 763 acres (of which 289 acres have yet to be reclaimed) and available shorelines of 3.5km. TLP serves mainly the hinterland in its handling of petroleum, petroleum products and biodiesel.

Given that the port has not commenced its principal activity of handling liquid bulk cargo, and that most of the port facilities are still under construction, MARC believes that this adds an element of uncertainty to its operating profile.

Nonetheless, MARC is of the view that the rapid pace of on-going hinterland development would support revenues and earning growth in the coming years. The land lease agreements TLP has entered with financially and technically capable entities provide further cash flow certainty. Cash flow projections indicate heavy reliance on income from the lease of land in 2008 and 2009 until the planned infrastructure works under phase 2 are fully completed and operational.

The Sukuk Musyarakah begins amortizing in its seventh year while the MCP/MMTN will amortize in its fourth year. TLP’s relatively light Sukuk service obligations in the first three years provide an adequate time frame for the port operations to stabilize. Financial projections demonstrate that under moderately adverse scenarios, TLP’s finance service coverage ratio (FSCR) would remain above the covenanted level of 2.0 times. Financial covenants under the Sukuk Musyarakah and MCP/MMTN limit additional debt and equity distributions. Before TLP makes a dividend payment, it has to ensure that all financial covenants including a maximum total indebtedness to tangible networth ratio of 80:20 are complied with prior to and post distribution.

The stable outlook assumes that the construction of port facilities and operations will proceed as planned and that there will be no significant shortfalls in actual versus projected income from the leasing of land over the next two years.

14 May 2008