MARC has affirmed its AAAIS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. TTM SPV is a funding vehicle of Trans-Thai Malaysia (Thailand) Ltd (TTMT), a 50:50 joint-venture between Petroliam Nasional Berhad (PETRONAS) and Thailand's PTT Public Company Ltd (PTT). TTM SPV was incorporated to raise funding for the construction of two gas pipelines to transport natural gas from the Joint Development Area (JDA) to Rayong, Thailand ('Project'). The aforementioned pipelines constitute the second phase (Phase II) of the Trans Thailand-Malaysia gas pipeline and separation project.

The affirmed rating reflects the project's satisfactory performance and cash flow generation since Phase II became fully operational in June 2010. Project debt service coverage for the six months to June 30, 2011 (1HFY2011) was within base case projections. The reliability of future cash flow, going forward, is supported by the credit strength of sole project offtaker PTT and contractual capacity revenues which expected to be more than adequate to service debt payments. The rating also takes into account the overall sound credit metrics of TTMT in light of the cross-acceleration and cross-default provisions between the sukuk and the syndicated bank loan taken to finance the first phase of the gas pipeline and separation project.

In addition, the rating continues to incorporate support uplift based on the project's economic importance and the financial strength of project sponsors, particularly the creditworthiness of PETRONAS. The sukuk rating is not constrained by Thailand's foreign currency rating notwithstanding the fact that TTMT and the sole offtaker are domiciled in Thailand and project revenues are denominated in the USD or THB equivalent. MARC believes that transfer and convertibility risks are adequately mitigated by the perceived strong incentive on the part of national oil company PETRONAS to provide ringgit liquidity in the event foreign exchange restrictions are imposed by the Thai government and affect TTMT's ability to convert THB-denominated payments into USD for onward remittance to TTM SPV.

The Phase II pipelines have been operating according to specifications and based on MARC's estimates, TTMT has been supplying 600 mmscfd of natural gas to PTT since June 2010. This represents full utilisation of the capacity subscribed by PTT under its long-term services agreement with TTMT. During 1HFY2011, the project recorded capacity revenue of THB580 million and cash flow from operations (CFO) of THB489 million. The project's net cash flow covered its debt service by 4.3 times, well above the corresponding financial covenant of 1.1 times. The high coverage level also reflects no amortisation of the sukuk principal until 2015. For the full year 2010, the project generated capacity revenue of THB1,114 million and CFO of THB924 million.

At company level, TTMT posted a pre-tax profit of THB1,904 million on a revenue of THB4,280 million in FY2010. For the 1HFY2011, it recorded a profit of THB345 million. MARC notes that company-level cash flow protection measures are stronger than that at project level (Phase II), providing additional support for the sukuk rating. TTMT gearing, as measured by the ratio of its debt-to-equity, rose to 1.4 times as at end-June 2011, but remains within its gearing cap of 70:30. Equity injections by project sponsors in prior years which had earlier helped the company maintain covenant compliance underscore the commitment of project sponsors to the gas pipeline and separation project.

The stable outlook on the rating reflects MARC's expectation that  the project's good operating record, predictable cash flow and the offtaker's very strong creditworthiness will limit the potential for downward movement in the rating. The outlook also reflects the expectation that TTMT's credit quality metrics will remain sound and that project sponsors will continue to demonstrate a long-term commitment to the project.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.