MARC has affirmed its rating of AAA(fg) on Segi Astana Sdn Bhd's (Segi Astana) RM470.0 million Medium Term Notes (MTN) programme with a stable outlook

MARC has affirmed its rating of AAA(fg) on Segi Astana Sdn Bhd's (Segi Astana) RM470.0 million Medium Term Notes (MTN) programme with a stable outlook. The rating reflects the unconditional and irrevocable financial insurer guarantee provided by Danajamin Nasional Berhad (Danajamin). Danajamin is rated by MARC at AAA/Stable based on the financial insurer's strong capital position and claims-paying resources relative to its risk exposure, and its status as a government-sponsored entity.

Segi Astana, a joint-venture between WCT Land Sdn Bhd (WCTL) (70%) and Malaysian Airports Holdings Berhad (MAHB) (30%), is developing the RM530.3 million integrated complex under a 25-year build-operate-transfer concession. The development, which adjoins the new low-cost carrier terminal (LCCT)   known as Kuala Lumpur International Airport 2 (KLIA2), is largely funded by the proceeds from the MTN programme. Comprising a landside mall with net lettable area of about 350,000 sq ft and a transportation hub, the integrated complex is 78.3% completed as at end-November 2012 and is expected to be operational by May 2013 in tandem with the scheduled opening of KLIA2. MARC expects the project to continue to benefit from the credit strength of its two sponsors, namely WCTL and MAHB. WCTL is a wholly-owned subsidiary of WCT Berhad (WCT), one of the largest domestic construction players, while MAHB is a government-linked corporation which owns and operates most of the country's airports. WCT's wholly-owned subsidiary, WCT Construction Sdn Bhd, is undertaking the construction on a fixed-price contract basis.

MARC views the construction and non-completion risk during the project's construction phase to be mitigated by the WCT group's strong construction track record and a RM17.5 million completion guarantee provided by WCT as well as an undertaking to fund any construction cost overruns. MARC also notes that Segi Astana would be able to leverage on the expertise in property management within the WCT group during the operational phase of the project. Nonetheless, MARC opines that the primary challenge for Segi Astana will be to secure a strong occupancy level for the retail mall. As at November 30, 2012, 53.5% of retail space has secured commitment for tenancy, and this is expected to increase as the project nears completion. Given that rentals form the bulk of its revenue, high occupancy levels are necessary for the company to be able to meet its financial obligations and maintain adequate debt service coverages. As such, lower-than-expected occupancy levels for the retail mall remain a key risk for the project during its operational phase.

MARC believes that key drivers of the project's ability to yield projected revenue and debt service coverages are the retail mall's passenger penetration rate and the airport's ability to sustain high passenger traffic levels. The volume of passenger traffic would depend on the competitiveness of air carriers serving the LCCT. Short-term variations in passenger traffic, meanwhile, can be caused by economic downturns, security threats and fuel cost spikes.

Projected debt service coverage of 2.15 times (x) to 5.08 times (x) assumes initial rent of RM22 per square foot and 70% occupancy in the first year of operations, 80% in the second and 90% throughout the concession period, in addition to the ability to increase rental rates by 10% every three years.  MARC considers the project's financing structure as appropriate for the project's risk profile and exposure to weaker-than-expected tenant demand. Segi Astana is required to maintain its paid-up share capital at no less than RM106.06 million upon or prior to the project reaching commercial operations, which corresponds to 20% of the project's construction costs. The rating agency notes that MAHB will contribute its 30% capital contribution in kind equal to lease rentals payable by Segi Astana to the airport operator for the use of the project site.

Noteholders are insulated from the concession's construction and operation phase risks by the   unconditional and irrevocable guarantee provided by Danajamin. 

Contacts: Ngiam Tee Wei, +03-2082 2268/ teewei@marc.com.my; Taufiq Kamal, +03-2082 2251/ taufiq@marc.com.my; Rajan Paramesran, +03-2082 2233/ rajan@marc.com.my 

December 28, 2012