MARC has assigned a rating of AAA(fg) to Segi Astana Sdn Bhd's (Segi Astana) RM470.0 million proposed guaranteed medium term notes (MTN) programme with a stable outlook.

The rating is based on the full, unconditional and irrevocable guarantee provided by AAA rated financial guarantee insurer (FGI) Danajamin Nasional Berhad (Danajamin) and reflects the FGI's strong capital position and claims-paying resources relative to its risk exposure, and its status as a government-sponsored entity.

The outlook on the programme rating reflects the stable outlook on Danajamin's insurer financial strength rating.

The issuer, Segi Astana, is a single-purpose company formed through a joint venture between property developer WCT Land Sdn Bhd (WCTL) and national airport operator Malaysia Airports Holdings Berhad (MAHB). Segi Astana holds the concession for the privatisation of the construction, development and financing of an integrated complex at the Kuala Lumpur International Airport (KLIA2) on a build-operate-transfer approach (the project).  The concession, which commenced on August 1, 2011, is for a period of up to 25 years and may be extended for a further period of 10 years at the option of the concessionaire.

The integrated complex, which is adjoined to the new low-cost carrier terminal, comprises a four-level retail mall with approximately 350,000 square feet of net lettable area and a transportation hub consisting of approximately 6,000 car park bays, 54 taxi bays and 26 bus bays which will be managed, operated and maintained by Segi Astana post-completion. The complex is designed to funnel passengers to and from immigration checkpoints into the mall.

Other key participants in the project are WCTL's parent company, WCT Berhad (WCT), which is also a signatory of the concession agreement (CA) with MAHB together with Segi Astana, and WCT Construction Sdn Bhd (WCTC) which is the main contractor and project manager for the construction of the integrated complex. WCT's role is viewed as important to the project's standalone creditworthiness given its contractual obligations as outlined in the CA and undertakings to cover construction cost overruns and debt service shortfalls during the project's first year of commercial operation.

The proceeds from the notes issued under the programme will be used mostly to finance up to 73% of project costs and reimburse the shareholders’ advances while the balance of the proceeds will be used to fund the debt service account, meet interest payment of the notes during construction and finance initial development costs and working capital needs of the project. Repayment of the notes, which have tenures of five to 14 years, is dependent on project revenues derived from the mall's rental income and parking charges.

Construction and non-completion risk during the project's construction phase is mitigated by a RM530.3 million fixed price contract with experienced contractor WCTC and a RM17.5 million completion guarantee from WCT.  Additionally, the risk of cost overruns is addressed by an undertaking by WCT to fund construction cost overruns. The project is on track for completion by end-2012 and the complex is scheduled to commence commercial operations in April 2013.

Weaker-than-expected tenant demand for the mall remains a key risk for the project during its operations phase. Its parking revenue, meanwhile, is subject to patronage or usage risk. MARC believes that key drivers of the project's ability to yield projected revenue and debt service coverages are the retail mall's passenger penetration rate and the airport's ability to sustain high passenger traffic levels. The volume of passenger traffic depends on the competitiveness of air carriers serving the low-cost carrier terminal. Short-term variations in passenger traffic, meanwhile, can be caused by economic downturns, security threats and fuel cost spikes.

Projected debt service coverage, which averages 1.86 times (x) with a minimum of 1.25x assumes initial rent of RM15 per square foot and 70% occupancy in the first year of operations, 80% in the second and 90% throughout the concession period, in addition to the ability to increase rental rates by 10% every three years. Expected debt service coverage is sensitive to occupancy levels and rental rate, which also hinges on the mall's ability to tap retail demand from market segments beyond airline passengers and airport visitors.

MARC considers the project's financing structure as appropriate for the project's risk profile and exposure to weaker-than-expected tenant demand. Segi Astana is required to maintain its paid-up share capital at no less than RM106.06 million upon or prior to the project reaching commercial operations, which corresponds to 20% of the project's construction costs. The rating agency notes that MAHB will contribute its 30% capital contribution in kind equal to lease rentals payable by Segi Astana to the airport operator for the use of the project site. Other credit positives are the financial flexibility afforded by the concession's 25-year tenure and high project sponsor commitment.

Noteholders are insulated from the concession's construction and operation phase risks by virtue of the unconditional and irrevocable guarantee provided by Danajamin.

Contacts:
Ahmad Gazzara Czillich, +603-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.