Published on 21 May 2018.
RAM Ratings has reaffirmed the AA1/stable rating of Northern Gateway Infrastructure Sdn Bhd’s (NGISB or the Company) RM340 million Medium-Term Notes Programme (2017/2034). NGISB holds the concession for the development of a new immigration, customs, quarantine and security complex (ICQS Complex or the Project) in Bukit Kayu Hitam, Kedah.
The reaffirmation takes into consideration an irrevocable and unconditional financial guarantee insurance policy (FGI Policy) from Danajamin Nasional Berhad (Danajamin) (rated AAA/stable/P1) which mitigates construction risk. The rating also reflects NGISB’s strong debt-servicing ability, underpinned by predictable concession cashflows from the Government of Malaysia (GOM).
To be undertaken in two phases, the Project has faced persistent delays due to factors such as delays in the availability of power supply and an ICT network as well as changes to the ICT design. A total of four extensions of time have been sought from the GOM, which have been approved. The Certificate of Acceptance (COA) for Phase 1 of the Project had been received on 26 February 2018. Meanwhile, construction of Phase 2 has begun, with about 4% of works completed as of February 2018.
The FGI Policy from Danajamin extends up to 31 October 2019 or up to the issuance of COAs for Phases 1 and 2, whichever is earlier. Noteholders are protected for up to the nominal value of RM340 million and one coupon obligation, should an event of default occur during the tenure of the FGI Policy, which includes the failure to procure COAs for Phases 1 and 2 or the termination of the Concession Agreement (CA). Comfort is also derived from the undertaking of the Company’s shareholder, DRB-HICOM Berhad, to meet all cost overruns, shortfalls in working capital and debt servicing during construction.
Upon project completion, NGISB is entitled to contractual cashflows from a strong counterparty, i.e. the GOM via the Ministry of Home Affairs. To date, the Company has yet to receive any concession payments for Phase 1 due to administrative issues, which are not uncommon during the early days subsequent to the completion of a project. Under our stressed scenario (which assumes delays in construction and concession payments as well as the optimisation of distributions to shareholders), the minimum debt service cover ratio is projected to be 1.50 times, in line with an AA1 rating for a low-complexity project. Meanwhile, the risk of cashflow leakage is minimised by the tight covenants and structural features of the transaction.
The transaction is, however, exposed to the risk of delays in concession payments as well as the termination of the CA, which may disrupt these payments. In the event of a termination due to default by NGISB during the construction phase, noteholders will be protected by the FGI Policy. Should the Company default on its obligations post-completion of the Project, outstanding financing raised for the construction of the completed phases as well as all outstanding Availability Charges and Asset Management Service Charges will be paid by the Ministry of Home Affairs. Given the low to moderate complexity of the asset management services, termination risk post-completion of the Project is viewed as low.
Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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