MARC has affirmed the ratings of DRIR Management Sdn Bhd’s (DRIRM) RM180 million Class A and RM160 million Class B Sukuk at AAIS and AA-IS respectively. The outlook on the ratings is maintained at stable. The ratings for both classes are premised on the continued strong cash flows generated on MHS Aviation Berhad’s (MHSA) service contracts which back its lease rental obligations under the Sukuk issuance. The ratings also incorporate protective structural features and covenants of the Sukuk, including the trapping of revenue from oil majors into a proceeds account at MHSA’s level, a payment waterfall which accords priority to the lease payments to DRIRM; and the strong security coverage afforded by aircraft/helicopters under the transaction. The higher rating of the Class A Sukuk considers the credit enhancement afforded by subordination of the Class B Sukuk and full funding of return payment and principal redemption of the Sukuk by MHSA’s lease payments to DRIRM. The stable outlook on the ratings reflects expectations that the cash flows from MHSA’s contracts will remain sufficient to meet the lease payment requirement and maintain compliance with financial covenants under the transaction.

DRIRM, a wholly-owned subsidiary of DRIR Equities Sdn Bhd (DRIRE) and a sister company to MHSA, was incorporated for the purpose of owning and leasing (on a dry basis) of aircraft/helicopters. Under the transaction, DRIRM may, from time to time, purchase the beneficial interest of aircraft/helicopters from MHSA using proceeds from the issued Sukuk. To date, DRIRM has acquired a fleet of 16 helicopters. The helicopters were leased back to MHSA, which remained as the aircraft operator, providing helicopter services to the oil and gas companies, mainly Exxon Mobil Exploration and Production Malaysia Inc, Petronas Carigali Sdn Bhd, Talisman Malaysia Limited and Carigali-Hess Operating Company Sdn Bhd.

The issuer of the sukuk has a priority claim on the cash flows of MHSA through the establishment of a proceeds account at MHSA’s level that will capture contract proceeds from the oil majors. The account, jointly operated by MHSA and the Trustee of the Sukuk, will distribute the available cash flow in accordance to a payment waterfall which gives priority to the monthly lease payments to DRIRM ahead of MHSA’s operating expenses. The pre-determined lease payments will fund profit payments and principal redemptions of the Class A Sukuk and about 57% of Class B Sukuk, leaving the unamortised balance exposed to refinancing risk at maturity. The risk, however, is somewhat addressed by high collateral value of the aircraft backing the Sukuk which as of January 2009, is valued at approximately US$113.2 million (RM401.9 million at exchange rate of RM3.55 to US$1.00). This translates into 1.3 times (x) security cover as of June 2009 on the outstanding Sukuk principal. The amortising structure of the transaction provides for increasing security cover over time, hence reducing the refinancing risk on Class B Sukuk towards maturity date.

MHSA’s capacity to meet its lease rental obligations continues to be supported by its strong dominant market position and the importance of its service to the country’s energy needs. MHSA’s long-term contracts with clients of good credit standing - Exxon Mobil Exploration and Production Malaysia Inc, Petronas Carigali Sdn Bhd and Talisman Malaysia Limited – collectively account for more than 60% of total revenue, affording relatively good revenue and cash flow visibility. About 65.5% of MHSA’s revenue is derived from fixed monthly standing charges, mitigating potential variability in revenue arising from fluctuations in flying hours, with a full pass-through of fuel cost increments clause in most of its contracts. Though the monopolistic position of MHSA has been challenged recently, MARC believes that there will be no significant threat to MHSA’s competitive position and ability to secure contract extensions and new contracts in the near-term, given its track record and established relationship with the oil majors.  Nonetheless, the inclination of the oil majors to award or renew contracts with shorter periods, as demonstrated by shorter contract extension periods by Petronas Carigali Sdn Bhd, may affect MHSA’s ability to match its revenues to its lease rental obligations for the remaining tenure of the Sukuk.
 
For financial year ending December 2008, DRIRM’s finance service cover ratio (FSCR) stood at 2.30 times (x), above its covenanted level of 2.25x. The limited remaining covenant headroom reflects the RM20 million principal redemption made for the Class A Sukuk in the second half of 2008. Meanwhile, MHSA has also comfortably complied with its gearing covenant of 0.75x having retired all its outstanding debt subsequent to completion of its restructuring exercise.

Contacts:
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my