MARC AFFIRMS ITS AA- IS RATING ON WESTSTAR CAPITAL SDN BHD’S RM900.0 MILLION SUKUK MUDHARABAH PROGRAMME

Oct 16, 2013 -

MARC has affirmed its AA-IS on Weststar Capital Sdn Bhd's (Weststar Capital) RM900 million Sukuk Mudharabah Programme with a stable outlook. Established for the purpose of facilitating the issuance of the sukuk, Weststar Capital is a wholly-owned subsidiary of offshore helicopter operator Weststar Aviation Services Sdn Bhd (Weststar). ‎

Securing the sukuk are the rights to receive 40% of revenue collections from five service contracts between the parent and identified oil majors, as well as 11 AW-139 AgustaWestland helicopters. The assigned revenues have a fixed monthly standing charges component as well as a variable component that is based on helicopter operating hours. Of the 11 helicopters, ten helicopters are currently used to service the 10-year contracts.

The affirmed rating of the sukuk issued by Weststar Capital reflects i) the strong and stable cash flow provided by five offshore helicopter service contracts with domestic and international oil majors of good credit standing; ii) the satisfactory operational capabilities and operating track record of Weststar to date on the aforementioned service contracts which lessens sukukholders' exposure to performance and termination risks; iii) structural protections which reduce event risk and sukuk holders' exposure to ‎downside cash flow scenarios, more specifically an undertaking by Weststar to fund any shortfall in the issuer's minimum required Finance Service Reserve Account (FSRA) balance and provisions under the terms of the programme to replace terminated contracts or dispose aircraft collateral.

The two notch rating differential between the programme rating and Weststar's corporate credit rating which MARC continues to maintain reflects: i) the very strong credit quality of the oil majors providing the principal payment stream for the  sukuk; ii) the rating agency's expectation that the 10 helicopters servicing the five aforementioned contracts ('10 helicopters') will be operated at or above the levels that eliminate the need to rely on Weststar (rated A/Stable) to make up shortfalls in cash flows for debt service; and iii) the adequate aircraft collateral coverage of indebtedness under the programme. Collateral coverage is less than 100% only in the first three years of the programme, a period during which MARC deems termination risk to be lowest. For the first six months of 2013 (1H2013)‎, the 10 helicopters recorded average monthly helicopter flight hours of  125.3 hours, above the 110.0 hours assumed in the original base case financial projections.

MARC believes that Weststar will maintain its satisfactory operating performance under the five service contracts; the offshore helicopter operator's limited operational and safety track record is moderated by its record of zero loss-time incidents from 2008 through end-June 2013. Progress of the build-up of the balance in Weststar Capital's FSRA remains within MARC's expectations; as of end-June 2013, its FSRA stood at RM62.7 million. The company is positioned to meet its forthcoming profit and sukuk repayments of RM21.8 million and RM60.0 million respectively in November 2013 without having to rely on parent liquidity support. Weststar Capital is expected to achieve a finance service cover ratio (FSCR) of 1.46 times for 2013 and maintain compliance with the programme's minimum required FSCR of 1.25 times.

Weststar's financial performance for FY2012 weakened relative to FY2011 despite improvements in revenue, on account of the holding company's higher financing costs. It posted a lower pre-tax profit of RM4.6 million on revenue of RM398.5 million for FY2012 (FY2011: RM10.1 million and RM280.4 million respectively). While its FY2012 performance reflected the earnings from the five aforementioned service contracts, MARC notes that the offshore helicopter operator has been successful in securing additional contracts valued at the equivalent of RM1.4 billion which should bolster revenue and earnings generation, going forward. Capital spending on the acquisition of helicopters has been weighing on Weststar's free cash flow generation, evidenced by its continuing negative free cash flow. Additionally, the high consolidated debt burden of the Weststar Group relative to its rather modest shareholders' funds remains a major constraint on the parent's rating level. Prospectively, the parent's financial profile is expected to improve with higher earnings from its new service contracts and a planned equity exercise that will reduce its accumulated losses and debt leverage to a level that is more consistent with its current rating level. ‎

Given the stro‎ng credit linkage between Weststar Capital and Weststar, a weakening in the parent's credit metrics will have negative implications for the rating of Weststar Capital's sukuk. Weststar's rating currently forms the base credit rating for the sukuk rating; the final rating incorporates uplift for structural protections and credit quality of the offtakers. The stable ‎outlook on the rating considers the stable and predictable nature of cash flows from the five service contracts as well as MARC's expectation of Weststar's satisfactory operating performance on the five service contracts and an anticipated strengthening of the parent's credit profile over the next 12 to 18 months.

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.