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). The sukuk was issued to fund the construction of two gas pipelines to transport natural gas from the Joint Development Area (JDA) to Rayong, Thailand (the Project) under the second phase (Phase II) of the Trans Thai-Malaysia gas pipeline and separation project.

The affirmed rating considers the strategic importance of the project to its sponsors as critical pipeline infrastructure for the Trans Thai-Malaysia gas pipeline and separation project, and the relatively predictable nature of cash flows generated under the project’s long-term services agreement which ends in 2045. The project’s revenue structure, in particular its availability-based capacity revenues, the sustained high pipeline utilisation rates by sole offtaker PTT and the operational reliability of the pipelines continue to support the project’s financial performance and compliance with its financial covenants. The rating also takes into account the credit strength of project offtaker PTT and the overall sound credit metrics of TTMT in light of credit linkages arising from 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 financial strength of its 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 US dollar or the Thai baht 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 Thai Baht-denominated payments into US dollars for onward remittance to TTM SPV.

The total daily available pipeline capacity of 600 million standard cubic feet per day (mmscfd) under Phase II has been essentially fully utilised since June 2010. All available pipeline capacity has been reserved solely by PTT under its long-term services agreement with TTMT. During 1H2012, the project recorded capacity revenue of THB437 million and earnings before interest, tax, depreciation and amortisation (EBITDA) of THB371 million. Its capacity revenue was lower than that for the full year 2011 and 2010 on an annualised basis. Year-on-year variations in revenue are mostly due to changes in the unit capacity reservation charge (UCRC) which is reviewed annually as well as movements in US$ - THB exchange rates given the project’s US$-denominated revenues. The project’s EBITDA margins have remained relatively stable in contrast with reported pre-tax earnings. For 1H2012, Phase II posted a pre-tax loss of THB 31.7 million and for full year 2011, it reported a pre-tax loss of THB172.9 million on account of unrealised foreign exchange losses on foreign currency denominated debt. Nonetheless, as the UCRC is reviewed annually for changes in the project’s cost components to ensure full recovery of service investment costs, fixed costs and to cover debt service and an equity return under normal operations, MARC believes that Phase II’s revenue structure should continue to support its debt service capacity. The project continued to exhibit comfortable covenant headroom in relation to its minimum required annual finance service coverage ratio (AFSCR) of 1.1 times (x), at 3.1x during 1H2012. MARC notes that there is no debt amortisation until 2015 which should help TTMT (and Phase II) build up its holdings of cash in the next two years, assuming modest dividend payouts. Additionally, Phase II’s cash reserves which are estimated at US$29.3 million as of December 31, 2012 are sufficient to fund the next three years’ profit payments on the sukuk amounting to US$23.3 million in the absence of dividend payments.

At the company level, TTMT posted lower revenue of THB2,301 million for 1H2012 compared to 1H2011, but higher pre-tax profits of THB618.9 million (1H2011: THB271.9 million) on account of lower finance costs after taking into account a smaller unrealised foreign exchange loss of THB158 million (1H2011: loss of THB508 million). Its core net profit remained flat at THB778 million while its gearing, as measured by the ratio of its debt-to-equity stood at 1.4 times as at end-June 2012, allowing for increased headroom under the company’s 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. Overall, TTMT continues to exhibit sound financial profile.

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 long-term commitment to the project.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my.