MARC has placed its AAIS senior and AA-IS subordinate debt ratings for DRIR Management Sdn Bhd’s (DRIRM) Class A and Class B Sukuk Ijarah on MARCWatch Developing pending completion of a proposed refinancing of the Sukuk. Seller-lessee in the Sukuk Ijarah's underlying sale and leaseback transaction and sister company, MHS Aviation Berhad (MHSA), is seeking to restructure its lease obligations and raise additional working capital financing after securing a key contract. Financial close for the refinancing of the Sukuk is expected to occur in by end-2010.

These developments will alleviate the current downward pressure on Sukuk ratings stemming from a breach of DRIRM's finance service cover ratio and lower-than-expected cash flow generation at MHSA. The latter has been generating lower-than-projected cash flow as a result of a delay in acquiring new aircraft and non-renewal of a key contract. This has affected MHSA's ability to maintain satisfactory cash flow coverage of lease rental obligations under the Sukuk from recurring revenues. Apart from lower cash flow generation at MHSA, departure from the priority of payments set forth in the transaction structure also contributed to DRIRM's breach of its finance service cover ratio (FSCR) covenant of 2.25x in December 2009. Priority had been given to operating expenses ahead of the lease payments from June 2009 through June 2010. The breach was cured in April 2010.

Based on MHSA's current cash flow generation levels, MARC expects MHSA's revenues to sufficiently cover its lease obligations under the Sukuk until April 2011. However, covenant violation is expected to persist at DRIRM until the refinancing takes place. Nonetheless, this assessment excludes the cash flow impact of recently secured key contract from Petronas and associated implications for DRIRM's liquidity position (MHSA had recently secured a sizable contract valued at RM3.5 billion from Petronas to provide oilfield logistics services for a period exceeding 10 years, starting April 2011). MARC is of the view that the new contract would not result in near-term cash flow and liquidity improvements.

MARC will continue to monitor the progress of MHSA's financing exercise and the refinancing of DRIRM's Sukuk to resolve the MARCWatch placement. Non-completion of MHSA's proposed financing could exert downward pressure on the ratings in the absence of mitigating developments such as aircraft disposals to replenish its finance service reserve account (FSRA) and restore its FSCR.

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