MARC has assigned a preliminary rating of AA- to Segi Astana Sdn Bhd’s (Segi Astana) proposed 10-year ASEAN Green Medium-Term Notes facility (MTN facility) of up to RM415.0 million with a stable outlook. Concurrently, MARC has affirmed its rating of AAA_(fg) with a stable outlook on Segi Astana's existing RM470.0 million Medium-Term Notes programme guaranteed by Danajamin Nasional Berhad (Danajamin). The guaranteed MTN programme reflects MARC’s insurer financial strength rating of AAA/Stable on Danajamin.

The proceeds from the proposed MTN facility will be utilised to fully settle the guaranteed MTN programme which has an outstanding amount of RM400.0 million as at December 12, 2017. Segi Astana is a 70:30 joint venture between WCT Land Sdn Bhd (WCTL), a wholly-owned subsidiary of WCT Holdings Bhd (WCT Holdings), and Malaysia Airports Holdings Bhd (MAHB), a government-linked entity. Segi Astana operates an integrated complex, gateway@klia2, at Kuala Lumpur International Airport 2 (klia2) under a 25-year build-operate-transfer concession expiring in 2037 (with an option to extend for another 10 years).

MARC’s preliminary rating is anchored on Segi Astana’s standalone rating of A+ with a one-notch rating uplift for liquidity support from WCT Holdings (AA-/Stable) for the repayment of RM135.0 million in the final year of the MTN facility in 2027. Segi Astana’s standalone rating primarily reflects the adequate projected cash flow coverage and the well-structured terms of the proposed issue. Moderating the rating are the challenges associated with achieving a higher occupancy level and improving the rental rates of the retail mall, a key component of gateway@klia2. The retail mall currently has net lettable area (NLA) of 355,977 sq ft, which would increase to about 369,261 sq ft in 2018; the other key component of gateway@klia2 is the car park which has 5,690 parking lots.

Since commencing operations in May 2014, the retail mall has achieved moderate occupancy levels of between 73.5% and 78.2% with average gross rental rates of RM23.42 psf in 2014 to RM20.32 psf in 8M2017. While overall rental revenue from the mall has not met initial projections, better-than-expected income from Segi Astana’s car park (40.1% of total revenue in 8M2017) has largely compensated for the shortfall. MARC views that the key driver of Segi Astana’s performance would continue to be the number of carriers operating at klia2 given the catchment at gateway@klia2 comprises mostly passenger traffic, meeters/greeters and the airport’s internal staff. Any sharp decline in the number of airlines operating at klia2 would affect footfall at gateway@klia2. MARC considers this risk as low given the near-full capacity at other airports in the vicinity.

The base case projections mainly incorporate an occupancy rate of 85% from 2019 onwards and average gross rental rate at the retail mall of RM20.00 psf with an escalation rate of 6% every three years. Segi Astana’s cash flows are expected to yield minimum and average pre-distribution debt service cover ratios (DSCR) of 2.01 times and 2.29 times respectively throughout the term of the MTN facility.

Under MARC’s stressed scenarios in which occupancy rate falls to 61.4% from 2018 onwards with no increase in rental rate, or if occupancy rate is at 70.0% but rental rate declines to RM17.56 psf over the term of the MTN facility, the minimum DSCRs with cash of 1.00 time are projected to occur only in 2026, the year before the final principal and interest payments are due under the proposed MTN facility. MARC notes that should the average gross rental rate remain at the current level of RM20.32 psf, the mall would need to achieve an occupancy rate of at least 64.8%, a 12.4% decline from the current rate, to meet the covenanted minimum DSCR requirement of 1.25 times.

MARC also observes that there is sufficient buffer for the refinancing of the RM135.0 million as the concession has a tail period of about nine years (19 years upon confirmation of the extension by MAHB) from the end of the proposed MTN facility in 2027. Furthermore, the issue structure is enhanced by the liquidity support from WCT Holdings in the form of a cash injection or unconditional bank guarantee for the refinancing amount, if the refinancing is not procured 12 months prior to the repayment date.

The stable outlook incorporates MARC’s expectations that the major revenue streams and cash flow protection metrics will continue to improve to support Segi Astana’s standalone rating. The rating could be upgraded if rental revenue and car park income demonstrate significant increases to afford sustainable improvement in its cash flow metrics. Downward rating pressure will develop if a significant decline in rental or car park income affects Segi Astana’s cash flow generation negatively. The AA- rating on the proposed MTN facility would revert to Segi Astana’s standalone rating if WCT Holdings’ rating is downgraded.

Contacts:
Wan Abdul Muiz Wan Abdul Ghafar, +603 2717 2939 / muiz@marc.com.my;
Yap Lai Ken, +603 2717 2947 / laiken@marc.com.my.