Published on 13 Aug 2019.
RAM Ratings has reaffirmed the AA1/stable rating of Northern Gateway Infrastructure Sdn Bhd’s (Northern Gateway or the Company) RM340 million MTN Programme (2017/2034). Northern Gateway holds the concession for the development of a new immigration, customs, quarantine and security complex (ICQS Complex or the Project) in Bukit Kayu Hitam, Kedah. The reaffirmation takes into consideration the fact that the Project has been physically completed, as well as the Company’s strong debt-servicing ability, underpinned by predictable concession payments from the Government of Malaysia (GoM) through the Ministry of Home Affairs (MoHA).
Undertaken in two phases, the Project had earlier faced persistent hold-ups arising from the delayed availability of power supply and an ICT network, plus changes in the design of the latter. In all, four extensions of time had been sought from the GoM. The Certificate of Acceptance (COA) for Phase 1 of the Project was received on 26 February 2018 while Phase 2 is physically complete and is awaiting the issuance of its COA.
The irrevocable and unconditional financial guarantee insurance (FGI) policy granted by Danajamin Nasional Berhad - to alleviate construction-related risks - is envisaged to expire once the COA is formally issued. Due to the potential delay in inking its lease and sub-lease agreements, however, Northern Gateway intends to seek the noteholders approval to extend the FGI policy to first quarter of next year.
On the costing front, the project’s remaining expenses - including around RM7 mil of variation orders - are anticipated to be amply covered by unutilised MTN proceeds and higher-than-expected interest income. Any further variation orders pertaining to ongoing rectification works, although deemed minimal, will need to be assessed in terms of credit impact if not funded by corresponding scope and payment of works by the MoHA, and/or the undertaking by DRB-HICOM Berhad to fund all extra expenses.
Upon the completion of the Project, Northern Gateway will be entitled to contractual payments from a strong counterparty, i.e. the GoM via the MoHA. Since the issuance of the COA for Phase 1 in early 2018, the Company has been receiving its monthly Availability Charges within RAM’s stressed assumption of a three-month delay in payments. Meanwhile, its performance remains satisfactory, with deductions under its maintenance charges ranging between 0% and 4% every month.
Following the completion of Phase 2 and the issuance of its COA, the Company’s Availability Charges will rise accordingly. This is expected to anchor its strong debt-servicing ability and RAM’s expectation of a minimum debt service coverage ratio (DSCR) of 1.50 times throughout the tenure of the MTN Programme (which commensurates with the AA1 rating of a low-complexity project). Notably, the risk of cashflow leakage is minimised by the tight covenants and structural features of the transaction.
The transaction is, however, exposed to the risk of termination of the concession agreement CA. If the Company were to default on its obligations after the completion of the Project, the MoHA will pay the outstanding financing raised for the construction of the completed phases as well as all outstanding Availability Charges and Asset Management Service Charges. Given the low to moderate complexity of the asset management services, however, post-completion termination risk is deemed low.
Davinder Kaur Gill
(603) 3385 2525
(603) 3385 2577
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Ratings on Northern Gateway Infrastructure Sdn Bhd