MARC has assigned a preliminary rating of AA-IS with a stable outlook to Weststar Capital Sdn Bhd's (Weststar Capital) proposed RM900 million Sukuk Mudharabah Programme. Weststar Capital is a special purpose entity wholly owned by Weststar Aviation Services Sdn Bhd (Weststar) that serves as the funding vehicle for the offshore aviation services provider.

Proceeds from the notes will be used largely to refinance up to RM870 million of existing debt at Weststar. The notes are secured by a deed of assignment of Weststar’s rights to revenue and income to be received under five 10-year service contracts with five oil majors, a charge over the 11 medium-sized AW-139 AgustaWestland helicopters, of which 10 are being used to fulfil the contracts, and an assignment of all insurance and takaful policies taken out on the assets of the issuer and Weststar. The notes are also collateralised by designated accounts to be opened and maintained in respect of the programme.

The revenue collections from the aforementioned five service contracts will be captured by project accounts from which 40% of collections is directed towards payment to Weststar Capital for its debt service; the balance is allocated to Weststar to meet operating expenses and capital expenditures in respect of the contracts, shareholder distributions, etc. However, in the event actual cash flows generated by the five contracts deviate significantly from the base case cash flow projections, additional amounts beyond the pledged 40% of collections will be applied to maintain Weststar Capital's finance service reserves at 1.25 times (x) of debt service in the most recent financial year in accordance to the minimum finance service coverage ratio (FSCR) covenant that Weststar Capital is required to maintain at all times.

The parent operating holding company has also undertaken to cover any debt service shortfalls. In addition to the ring-fencing of cash flows to provide certainty of payment, the transaction structure also incorporates contract termination triggers to execute disposal of aircraft collateral in the event of unexpected early terminations of the aforementioned service contracts and Weststar is unable to substitute the contract(s) in 90 days. This is designed to mitigate the impact of contract terminations, given that the contracts can be terminated at any time without a cause.  Although the net loan-to-value ratio (after adjusting for cash in designated accounts) of the transaction is projected to be high at 132% and 119% in 2012 and 2013 before declining to 90% in 2015, MARC assesses the risk of multiple without-cause terminations as low. Moreover, MARC expects the oligopolistic industry structure of the domestic offshore aviation services with its relatively high barriers to entry to remain intact over the intermediate to longer term horizon.

MARC's rating approach is based on the analysis of the credit quality of the payment flows generated by the five service contracts, the position of the notes in payment waterfall and the structural features of the transaction. The rating agency took into account the credit strength of the offtakers, the majority of which MARC considers to be comfortably positioned within the AAA and AA rating categories, the specialised nature of the assets which are financed by the notes and the availability-based payments provided by the five contracts, and historically low termination risk associated with such service contracts in the domestic context. Underpinning the stability of the payment flows is the fixed monthly standing charges Weststar receives for the availability of the helicopters; payments are designed to cover all fixed costs including financing costs and salaries.

The programme’s rating incorporates two notches of uplift from Weststar’s corporate credit rating. MARC considers the operational capabilities, track record and credit strength of Weststar to have a bearing on the programme rating as its non-performance under the service contracts would expose the rated notes to contract termination risk. While the rating agency consider's Weststar’s highly leveraged capital structure (debt-to-equity ratio of 9.4x as at end-2011) to be its main credit weakness, this is partly offset by satisfactory operational risk mitigation through technical support arrangements with competent and reputable parties, its defensible competitive position in the domestic offshore aviation services sector and the stability of its earnings stream at the A rating level. After adjusting Weststar’s equity to include an unsecured, interest free loan from directors with no fixed terms of repayment amounting to RM84.7 million, the company’s adjusted debt-to-equity ratio is 4.35 times (6MFY2010: 1.59 times). The corporate credit rating of Weststar is also constrained by its short operating track record as an offshore aviation services provider which only dates back to 2008. Weststar projects minimum and average FSCRs of 2.07x and 2.97x on a consolidated basis over the tenure of the programme.

MARC does not envisage positive pressure being exerted on the programme rating in the next 12 to 18 months. In the longer term, positive pressure could be exerted on the rating if the credit metrics of Weststar show sustained improvement, particularly its capital structure. Negative pressure could be exerted on the rating as a result of lower-than-anticipated cash flow generation on the five contracts providing debt service, resulting in weaker FSCRs and lower liquidity at Weststar Capital and/or deterioration in Weststar’s business and/or financial metrics.

Contacts:
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.