MARC has affirmed its AAA_IS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. The outstanding sukuk amounts to RM500 million.

TTM SPV is a funding vehicle for the second phase of the Trans Thailand-Malaysia project (TTM Project Phase II), consisting of two gas pipelines between the Malaysia-Thailand Joint Development Area (JDA) and the industrial city of Rayong in Thailand. TTM SPV is wholly owned by Trans Thai-Malaysia (Thailand) Ltd (TTMT), a 50:50 joint-venture company between Petroliam Nasional Berhad (PETRONAS) and PTT Public Company Ltd (PTT), the national oil companies of Malaysia and Thailand respectively.

The affirmed rating is driven by MARC’s assessment of a very high likelihood of support from project sponsors, namely PETRONAS and PTT based on their strategic and reputational interests to ensure the success of the government-to-government TTM project. This assessment is reinforced by the presence of cross-acceleration and cross-default provisions between the rated sukuk and the syndicated financing taken to finance the first phase of the TTM project of which PETRONAS is the main offtaker. In this regard, MARC considers PETRONAS’ strong incentive to provide ringgit liquidity to meet financial obligations on the rated sukuk in the event of transfer and convertibility issues given that PTT and TTMT are domiciled in Thailand while project revenues are denominated in US dollars or Thai baht equivalent. PETRONAS has a senior unsecured rating of AAA/Stable from MARC, based on publicly available information.

MARC views the predictable nature of project cash flow on the back of a cost-plus tariff structure under the long-term service agreements with PTT and PETRONAS as supportive of finance service requirements for the TTM Project Phase II. For 1H2016, TTM Project Phase II registered an unaudited lower service revenue of US$9.6 million (1H2015: US$11.9 million) attributable to a decrease in the unit capacity reservation charge (UCRC) to US$137.95 per million standard cubic feet (mmscf) from US$143.10/mmscf in 1H2015. Notwithstanding this, the rating agency draws comfort from the UCRC mechanism which incorporates rate adjustments on a yearly basis to ensure sufficient debt coverage and adequate equity returns. Liquidity risk is mitigated by TTM SPV’s finance service reserve account balance of US$11.5 million (or RM51.1 million equivalent based on the exchange rate of RM4.45/US$1) as at end-December 2016. The rating agency expects a gradual build-up of TTM SPV’s cash buffer to cover the next 12-month sukuk profit totalling RM23.2 million as well as the next principal repayment of RM50.0 million due on November 15, 2017.

At the company level, TTMT registered service revenue and operating profit of US$52.4 million and US$33.1 million respectively in 1H2016. Its cash flow from operations (CFO) increased significantly to US$61.3 million mainly due to lower working capital requirements in 1H2016 (1H2015: US$37.9 million). Coupled with a lower dividend payout of US$2.2 million in 1H2016 (1H2015: US$8.6 million), TTMT posted higher free cash flow of US$50.0 million compared to US$21.6 million in the last corresponding period. MARC regards the debt service capacity of TTMT as resilient given the CFO interest cover ratio of 6.77 times. As at June 30, 2016, TTMT maintained a healthy liquidity position with cash and cash equivalents of US$139.5 million.

TTMT’s leverage position continued to improve in 1H2016 as project debt was pared down. The rating agency expects a faster build-up of TTMT’s equity base going forward as a result of a decrease in financing costs, following the completion of the Phase I project debt refinancing exercise in September 2016. Its debt-to-equity (DE) ratio of 50:50 as at June 30, 2016 was well within the covenanted requirement of 70:30.

The stable outlook reflects MARC’s expectation that TTM Project Phase II will achieve stable operating performance and TTMT will maintain its sound credit metrics. Any weakening of the project sponsors’ commitment and support to the project will exert pressure on the rating.

Contacts:
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.