Published on 02 Nov 2020.
RAM Ratings has reaffirmed the AA1/stable rating of Northern Gateway Infrastructure Sdn Bhd’s (Northern Gateway or the Company) RM340 mil MTN Programme (2017/2034). Northern Gateway holds the concession for the development of the immigration, customs, quarantine and security complex (the Project) in Bukit Kayu Hitam Kedah. The reaffirmation reflects our expectation that the Company will be able to sustain its strong debt-servicing aptitude through a steady inflow of Availability Charges (ACs) it is entitled to receive from the Government of Malaysia (GoM) – via the Ministry of Home Affairs (MoHA) – following the Project’s completion.
As of the last principal repayment month of August 2020, Northern Gateway’s debt service coverage ratio (DSCR) stood at 2.13 times (with cash balances, post-distribution, calculated over a 12-month period in payment months). This exceeds RAM’s expectation of 1.71 times owing to the delays in the Company’s settlement of construction related costs which RAM had anticipated to take place during the period. Our projection incorporates a three-month delay in the receipt of ACs from invoicing dates, additional costs and optimisation of distributions as allowed by the covenants, i.e. RM36 mil throughout the MTN’s tenure.
Based on our analysis, the Company is anticipated to register respective minimum and average DSCRs of 1.56 and 2.11 times throughout the remaining tenure of the MTN. These commensurate with RAM’s AA1 rating for a non-complex public-private partnership/private finance initiative project (base case: 4.40 and 5.47 times, assuming no distributions throughout the MTN’s tenure). The risk of cashflow leakage is minimised by the transaction’s tight covenants and structural features.
Physical works for Phases 1 and 2 have been completed and accepted by the GoM via the issuance of certificates of acceptance (COAs) on 26 February 2018 and 19 August 2019, respectively – the COA for Phase 2 was backdated to and took effect on 26 June 2019. Timely receipt of ACs is crucial as any material delay may affect Northern Gateway’s debt-servicing ability. In 2019 and 5M 2020, ACs were received within an average of a respective 57 and 48 days from the invoice dates, i.e. in line with our stressed assumption of 90 days.
The Company is also entitled to monthly asset management service charges (AMSCs), which are subject to performance deductions. Thanks to the maintenance company’s (DRB-HICOM Environmental Services, DHES) commendable performance, deductions have been minimal at a respective 3.25% and 0.72% of maintenance service charges in 2019 and 5M 2020. AMSCs were received within an average of 81 days in 2019 and while there have been delays in 5M 2020 exceeding 90 days from invoicing date, we note that the back-to-back payments to DHES have also been deferred. Operation and maintenance services ran as usual throughout the various stages of the movement control order (MCO) as well as during Kedah’s administrative MCO in August 2020, following the surge in COVID-19 cases there.
Northern Gateway has yet to sign the lease and sub-lease agreements for Phase 2 with the Federal Lands Commissioner. This is supposed to be done within 30 days from the issuance of the COA. In 1H 2020, the MTN holders granted an extension of time to 31 March 2021 for signing of the agreements. The delay is not expected to have any adverse cashflow impact, as evident from the receipt of ACs and AMSCs since the Project’s completion.
Meanwhile, the final construction cost is still subject to potential variation work orders from the MoHA which must be assessed for credit impact if not funded by the GoM, and/or by Northern Gateway’s ultimate shareholder (DRB-HICOM Berhad). RAM has conservatively imputed RM10.09 mil of additional costs. These, together with the remaining unpaid construction costs, are expected to be covered by unutilised construction funding. The transaction is exposed to the risk of termination of the concession agreement during the asset-management services period. Given the low to moderate complexity of such services, however, post-completion termination is deemed unlikely.
Seri Nuralya Munawir
(603) 3385 2484
(603) 3385 2577
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Ratings on Northern Gateway Infrastructure Sdn Bhd