MARC has affirmed its AA-IS rating on Weststar Capital Sdn Bhd’s (Weststar Capital) RM900 million Sukuk Mudharabah Programme with a stable outlook. Weststar Capital, a wholly-owned subsidiary of offshore helicopter service provider Weststar Aviation Services Sdn Bhd (Weststar), was set up for the sole purpose of facilitating the issuance of the sukuk. 

The sukuk is secured by the rights to receive 40% of revenue from five offshore service contracts between Weststar and five oil majors, including PETRONAS Carigali Sdn Bhd, which MARC considers to be within the AAA and AA rating categories. The sukuk is also secured by legal charges over 11 AW-139 AgustaWestland helicopters and a corporate guarantee from parent Weststar. The affirmed rating benefits from a two-notch rating uplift from Weststar’s corporate credit rating of A/Stable on account of structural ring-fencing of assigned revenue from the service contracts from strong creditworthy oil majors and the priority of payment into Weststar Capital’s finance service reserve account (FSRA). The revenue from the service contracts comprises an availability-based fixed payment component and a variable component based on helicopter flight hours. Of the 11 helicopters charged to sukukholders, 10 are currently being used to service these 10-year contracts.

The rating also considers the sukuk programme’s structural protections that include an undertaking from Weststar to fund any shortfall in Weststar Capital’s minimum required FSRA balance, as well as to provide substitute offshore service contracts within 90 days or dispose the helicopter collateral in the event of contract termination. MARC’s assessment of Weststar Capital’s cash flows reveals low reliance on its parent to make up cash shortfalls while the satisfactory operational and safety track record of Weststar to date mitigate performance and termination risks. The rating agency notes that helicopter collateral coverage of indebtedness under the sukuk programme remains adequate and is expected to improve as the sukuk amortises.

For 2013, Weststar’s revenue grew strongly by 32.6% year-on-year to RM525.6 million (2012: RM396.4 million) while pre-tax profit rose to RM78.2 million (2012: pre-tax loss of RM0.7 million). The improved performance was supported by four new offshore service contracts that utilised five helicopters during the year. Nonetheless, persistent negative free cash flow, which amounted to RM207.8 million in 2013 (2012: negative RM183.5 million), remains a concern. MARC notes that Weststar’s capital structure has strengthened from investments by OAS Investment Limited, a subsidiary of multinational private equity firm KKR & Co. L.P., in October 2013. The company acquired a 40% stake in Weststar, boosting its share capital and share premium to RM388.9 million from RM100.0 million. MARC views the capital investment has supported the improvement in Weststar’s liquidity and leverage positions as evident in cash and cash equivalents of RM174.8 million and adjusted debt-to-equity ratio of 2.5 times as at end-2013 (2012: RM19.8 million; 13.1 times).

For the first half of 2014 (1H2014), MARC notes that the 10 helicopters’ average monthly flight hours of 106 hours were lower than the base case assumption of 110 hours, although the impact on cash flow is deemed minimal. Weststar Capital’s first principal redemption and profit payment totalling RM103.5 million in November 2013 were met from the operating cash flows (CFO) of RM130.2 million and an opening cash balance of RM21.0 million. This translated to a FSCR of 1.46 times, which is projected to average at 1.33 times for the remaining tenure of sukuk programme against the covenanted 1.25 times. For the upcoming principal and profit payments of about RM111 million due in November 2014, the credit balance of the issuer’s FSRA of RM129.5 million as at September 30, 2014 was adequately above the minimum required build-up amount.

The rating and outlook on Weststar Capital continues to be driven by Weststar’s credit profile given the strong credit linkage between Weststar Capital and its parent. Any material weakening of Weststar’s credit metrics, in particular cash flow protection and leverage metrics, would have negative implications on the ratings. Negative pressure could also be exerted on the sukuk rating if cash flow generation from the assigned contracts significantly underperform the base case projections, resulting in weaker FSCRs and lower liquidity at Weststar Capital.

Contacts:
Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.