Published on 17 Dec 2021.
RAM Ratings does not expect the AA1/Stable rating of Northern Gateway Infrastructure Sdn Bhd’s (the Company) RM340 mil Medium-Term Notes (MTN) Programme (2017/2034) to be impaired by recent developments which may affect its cash generating ability. Our view is premised on Northern Gateway’s sound liquidity position and continued ability to meet debt coverage indicators corresponding with the AA1 rating up to end-2023.
Northern Gateway was awarded a concession by 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.
The Company had, since the Project’s completion, received monthly Availability Charges (ACs) and Maintenance Charges (MCs) provided for by the Concession Agreement (CA). However, following a prolonged delay in inking the lease and sub-lease agreements for Phase 2 of the Project, the MoHA notified the Company (on 11 November 2021) that it had deferred Phase 2 ACs amounting to RM1.25 mil per month. The agreements entered into with the Federal Lands Commissioner, which relate to land occupancy rights for the Project, were to be signed 30 days from the issuance of the Certificate of Acceptance for Phase 2. The deferment, effective 26 September 2021, would remain in place pending the signing of the said agreements.
Northern Gateway is appealing the MoHA’s decision. Under RAM’s stressed cashflow analysis and assumptions, the Company’s near-term debt servicing capacity remains in line with an AA1-rated low complexity public-private partnership/private finance initiative transaction. We expect the Company’s debt repayment capacity, as measured by its annual finance service coverage ratio (FSCR, with cash balances, calculated on payment dates), to stay above 1.50 times over the next two years. Our scenario analysis assumes the lease agreements will be formalised by end-2023 and AC payments for Phase 2 will recommence in January 2024, with all withheld AC payments received on the same date. We have also assumed the curtailment of any dividend distributions and/or shareholder repayments, a three-month delay in the receipt of other CA-related payments and zero margins on MCs.
Cashflow analysis aside, we remain cautious of Phase 2 ACs being potentially delayed beyond end-2023, in the event of which the rating impact will have to be reassessed as Northern Gateway’s cash generating ability may be strained further. We draw comfort from the uninterrupted AC payments for Phase 1 of the Project. Apart from the deferment of payments in relation to Phase 2, the ministry’s letter to Northern Gateway made no assertion of the latter’s failure to meet its obligations as per their CA.
We were informed following a recent meeting of the MoHA, Northern Gateway and all agencies currently operating at the ICQS complex that the operations and maintenance of the Project (both Phases 1 and 2) would proceed in accordance with the CA and MCs would continue to be paid with no interruption risk.
Further details are anticipated in the coming months. We expect the agreements to be inked by mid-2022 based on management’s estimates, or year-end at worst. In this regard, we will continue to evaluate the impact of any persistent delays on the rating of the MTN.
Seri Nuralya Munawir
(603) 3385 2484
Davinder Kaur Gill
(603) 3385 2525
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Ratings on Northern Gateway Infrastructure Sdn Bhd