[RAM] RAM Ratings to closely monitor developments for Northern Gateway's transaction subsequent to on-going request for CS timeline extension
RAM Ratings is keeping the AA1/Stable rating of Northern Gateway Infrastructure Sdn Bhd’s (the Company) RM340 mil Medium-Term Notes (MTN) Programme (2017/2034) under close surveillance, as it did not meet its conditions subsequent (CS) obligations under the MTN Programme which was due to be fulfilled by 31 March 2022. The Company had on 1 April 2022 sought sukukuholders’ consent for a further extension up to 31 December 2022 to complete its CS – the matter is to be deliberated during the extraordinary general meeting on 25 April 2022.
Failure to meet the CS is tantamount to a breach of obligations and constitutes an Event of Default (EoD) for the transaction, if not remedied by 30 April 2022 (or any other extension granted by sukukholders). If the CS remains unresolved, the sukuk trustee via a sukukholders’ extraordinary resolution may declare an EoD, following which the outstanding amounts under the MTN Programme are immediately due and payable.
The Company is entitled to monthly payments under its concession agreement with the Government of Malaysia via the Ministry of Home Affairs (MoHA) for the construction and maintenance of the immigration, customs, quarantine and security complex (the ICQS complex or the Project) in Bukit Kayu Hitam, Kedah. The Project was handed over to the MoHA for use in 2019 upon completion of construction. As CS for the MTN Programme, the Company was to execute its lease and sub-lease agreements related to land occupancy rights within 30 days of the Project’s Certificate of Acceptance (CoA) issuance, and within 45 days of the CoA under its MTN Programme. The Project CoA for Phase 1 was issued on 26 February 2018 while it was issued on 19 August 20191 for Phase 2.
The Company’s inability to meet the CS stemmed from the delayed transfer of specific portions of the Project’s land to the Federal Land Commissioner (FLC) by the Kedah state, worsened by pandemic-related movement restrictions and challenges. Consequentially, this resulted in prolonged delays in executing the lease and sub-lease agreements for Phase 2 of the Project.2
Due to the delays, the MoHA had then notified the Company on 11 November 2021 that it will withhold or defer Phase 2’s monthly availability charges (ACs) from 26 September 2021 until these two agreements are signed. The ACs is a key source of concession inflows to service the Company’s debt repayments, and amounts to RM1.25 mil per month of payment withheld. Prior to that, the monthly AC payments for Phase 2 between July 2019 to August 2021 were received in full and in a timely manner.
The CS extension is pending the Company meeting the bondholders’ request for an additional liquidity support mechanism of up to RM20.08 mil i.e. equivalent to any withheld payments by the MoHA up to end-2022. As it stands, DRB-Hicom Berhad (the Company’s ultimate shareholder) has agreed to inject RM20.08 mil into the Company’s transaction designated account by 22 April 2022.
We highlight that despite these negative developments, there has not been any material credit impairment from a debt coverage, liquidity and cashflow standpoint. Based on representations by various transaction parties to date, we view the likelihood of an EoD being declared to be remote, given the status of progress relating to the land transfer, lease and sub-lease agreements and contingent liquidity support. As of 22 March 2022, the Phase 2 land has already been transferred to the FLC, the eventual signatory to the lease and sub-lease agreements. We also note that apart from the deferment of payments in relation to Phase 2, the MoHA has made no other assertions of the Company’s failure to meet its obligations as per their CA.
Under RAM’s stressed cashflow analysis and assumptions, the Company’s near-term debt servicing capacity – even in the absence of the Phase 2 AC payments and excluding DRB-Hicom’s cash injection – remains commensurate with the required coverages to support a AA1 rating under RAM’s methodology for rating low complexity public-private partnership/private finance initiative transactions. Its debt repayment capacity, as measured by its annual finance service coverage ratio (FSCR, with cash balances, calculated on payment dates), will remain above 1.50 times, even if Phase 2 ACs are withheld up to end-2024.
The Company’s FSCR for February 2022 came in at 2.49 times, stronger than our projected 1.50 times, thanks to delayed settlement of construction-related costs which helped boost cash reserves. As at end-February 2022, its cash reserves (excluding cash balances earmarked for remaining construction related costs) stood at RM48.07 mil, amply covering the RM30.60 mil of MTN obligations due over the next 12 months. Furthermore, the Company has undertaken to limit dividend and distribution payments until this matter is resolved. Nonetheless, we will continue to closely monitor the transaction and make the necessary announcements as further details are made available to us in the coming weeks.
1 Backdated to 26 June 2019.
2 Phase 1 lease and sub-lease agreements were respectively inked on 2 and 3 April 2018.
Seri Nuralya Munawir
(603) 3385 2484
Davinder Kaur Gill
(603) 3385 2525