RAM Ratings reaffirms Northern Gateway’s AA1/Stable issue rating

Published on 11 Aug 2022.

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RAM Ratings has reaffirmed the AA1/Stable rating of Northern Gateway Infrastructure Sdn Bhd’s (the Company) RM340 mil MTN Programme (2017/2034). 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 Project) in Bukit Kayu Hitam, Kedah. 

The reaffirmation is premised on Northern Gateway’s strong debt servicing ability, thanks to its healthy cash reserve and the steady inflow of Availability Charges (ACs). Monthly ACs amount to RM2.47 mil for Phase 1 and RM1.25 mil for Phase 2.

As conditions subsequent (CS) to the transaction, Northern Gateway is to sign lease and sub-lease agreements for each phase of the Project.1 The Company currently has until 31 December 2022 to execute lease agreements for Phase 2. With the successful transfer of a parcel of Phase 2’s project land to the Federal Land Commissioner on 22 March 2022, progress towards this end has been promising. Management expects both agreements to be signed by end-2022. Although unlikely, noteholders may declare a default if the transaction’s CS are not fulfilled on time, following which outstanding amounts under the MTN Programme would become immediately due and payable.

The MoHA has withheld Phase 2 ACs (beginning 26 September 2021) pending the signing of lease agreements. To reinstate the transaction’s cashflow, and as a prerequisite to bondholders’ approving the CS timeline extension, the Company procured a RM20.08 mil bank guarantee (BG). The BG can be drawn should the transaction’s debt service coverage ratio (DSCR) dip below 1.50 times. We have excluded the BG from our analysis as we view it to be temporary given provisions for the BG’s cancellation when deferred ACs are received. 

Northern Gateway’s DSCR of 2.49 times in February 2022 surpassed our projected 1.50 times given delayed settlement of outstanding construction costs which bumped up its cash pile. Excluding cash balances earmarked for remaining construction-related costs, the Company’s RM46.41 mil cash reserve as at end-May 2022 should amply cover RM30.60 mil of MTN obligations due over the next 12 months. Meanwhile, the receipt of ACs has largely been within our stressed assumption of a three-month delay. Under RAM’s stressed scenario and assumptions, the transaction’s minimum DSCR (with cash balances, post-distribution, calculated over a 12-month period in payment months) is expected to stay above 1.50 times, in line with a AA1 rating. Holdups of Phase 2 ACs beyond our stressed assumption of up to end-2024 will have to be reassessed to ascertain any credit impact.

While the Project is complete, construction costs have yet to be finalised pending the MoHA’s approval of minor rectifications and potential variation work orders. Any remaining unpaid construction costs will be covered by unutilised construction funding. Northern Gateway is also ceasing dividend distributions and/or shareholder repayments until the lease agreements are inked and Phase 2 ACs resume. 

Operation and maintenance services remained uninterrupted amid the suspension of Phase 2 ACs and pandemic-induced travel restrictions. On that note, Alam Flora Environmental Solutions Sdn Bhd (AFES), which undertakes the Project’s maintenance services, has kept a commendable track record to date. Despite notable delays in the receipt of AMSCs due to the protracted payment approval process, concurrently withheld payments to AFES alleviate any cashflow pressure. Although the MTN Programme is exposed to the risk of termination of the concession agreement during the asset management services period, this is deemed unlikely considering the low complexity of these services.

1 Phase 1 lease and sub-lease agreements were respectively inked on 2 and 3 April 2018.


Analytical contacts
Seri Nuralya Munawir
(603) 3385 2484

Davinder Kaur Gill
(603) 3385 2525


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Published by RAM Rating Services Berhad
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