Published on 30 Jul 2021.
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 had been awarded a concession by the Government of Malaysia (GoM) – via the Ministry of Home Affairs (MoHA) – for the design, development, construction and completion as well as maintenance of the immigration, customs, quarantine and security complex (the Project) in Bukit Kayu Hitam, Kedah. The reaffirmation is premised on Northern Gateway’s strong debt servicing ability, thanks to the steady inflow of concession-based Availability Charges (ACs) it is entitled to receive following the Project’s completion.
RAM’s stressed analysis indicates that the Company will record respective minimum and average debt service coverage ratios (DSCRs) of 1.52 and 1.95 times (with cash balances, post-distribution, calculated over a 12-month period in payment months) while distributing a cumulative RM38.5 mil of dividends throughout the MTN’s tenure (base case: 2.67 and 4.14 times). These commensurate with RAM’s AA1 rating for a non-complex public-private partnership/private finance initiative project. Our projection incorporates a three-month delay in the receipt of ACs from invoice dates, zero asset management service charges (AMSCs) margins, additional construction costs and optimisation of distributions as allowed by the transaction covenants.
Even with RM5 mil of distributions paid out, Northern Gateway’s DSCR of 2.66 times surpasses our projected 2.41 times in February 2021 (the most recent MTN repayment date). This is due to the Company’s stronger cash reserves given delays in the settlement of outstanding construction costs. The risk of transaction cashflow leakage is minimised by the MTN’s tight covenants and structural features.
We note that construction has been completed, with certificates of acceptance (COAs) for both Phase 1 and Phase 2 issued by the GoM. Finalisation of the Project’s construction cost is currently pending the MoHA’s approval of minor rectifications and potential variation work orders. Any remaining unpaid construction cost is expected to be sufficiently covered by unutilised construction funding.
The timeliness of AC inflows remains a risk as any material delay may affect Northern Gateway’s debt-servicing ability. All said, ACs were received within an average of a respective 48 and 42 days from the invoice dates in FY Dec 2020 and 5M FY Dec 2021. This falls comfortably within RAM’s stressed assumption of a 90-day payment delay.
Northern Gateway receives monthly AMSCs that are subject to performance deductions. The company providing maintenance services, i.e. Alam Flora Environmental Solutions Sdn Bhd (AFES) (formerly known as DRB-HICOM Environmental Services), has been performing satisfactorily; it only incurred minor penalties of 2.49% and 2.42% in FY Dec 2020 and 5M FY Dec 2021, respectively. The receipt of AMSCs has been mostly delayed since March 2020, following prolonged administrative processes amid the various stages of the Movement Control Order. Nonetheless, the deferment of payments to AFES, in line with the holdup in AMSC receipts, has alleviated any potential impact on the transaction’s cashflow. Operation and maintenance services have been running uninterrupted throughout the pandemic, despite movement restrictions between Malaysia and Thailand.
As with other project financing transactions, this one is also exposed to the risk of termination of the concession agreement during the asset-management services period. Given the low complexity of such services, however, post-completion termination is deemed unlikely. In any case, should the concession be terminated owing to Northern Gateway’s default, the GoM will then pay the outstanding sum of financing raised for the Project’s construction and all outstanding ACs and AMSCs to the Company. If the GoM defaults on its obligations, it must then pay Northern Gateway the present value of ACs throughout the remaining concession period, alongside all outstanding payments under the concession agreement.
Northern Gateway has yet to ink the lease and sub-lease agreements in relation to the Phase 2’s project land occupancy rights with the Federal Lands Commissioner. This was supposed to have been done within 30 days from the issuance of Phase 2’s COA. The new deadline to complete both agreements and to assign the sub-lease agreement as security for the transaction is 31 March 2022. RAM does not foresee any adverse cashflow impact from this delay, as evident from the prompt receipt of ACs and AMSCs to date.
Seri Nuralya Munawir
(603) 3385 2484
Davinder Kaur Gill
(603) 3385 2525
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Ratings on Northern Gateway Infrastructure Sdn Bhd