MARC is revising the MARCWatch status of its AAIS&and AA-IS&ratings on DRIR Management Sdn Bhd's (DRIRM) RM180 million Class A and RM160 million Clas (more)
MARC is revising the MARCWatch status of its AAIS&and AA-IS&ratings on DRIR Management Sdn Bhd's (DRIRM) RM180 million Class A and RM160 million Class B Sukuk
Ijarah facilities respectively to negative from developing. The ratings were initially placed on MARCWatch Developing on September 21, 2010 pending the completion of a proposed refinancing of the Sukuk. MHS Aviation Berhad (MHSA), the seller-lessee in the underlying sale and leaseback Sukuk Ijarah transaction, intends to restructure its lease obligations and raise additional working capital financing for a recently secured key contract from Petronas Carigali Sdn Bhd.
This rating action follows news of a delay in refinancing of the Sukuk programme. MARC had cautioned in September 2010 that while MHSA's internal cash flow would be sufficient to cover its lease obligations under the Sukuk until April 2011, DRIRM would likely remain in BReach of its finance service cover ratio (FSCR) until the completion of the refinancing. Since MARC's last rating action, monthly lease payments by MHSA into DRIRM's escrow account have persistently fallen short of the pre-determined amounts agreed under the transaction at transaction close, causing DRIRM's FSCR to fall below the transaction's minimum required level of 2.25 times (x) at 1.51x as of December 2010. Although DRIRM has obtained a waiver on its covenant BReach and covenant relief by way of an amendment of the FSCR covenant to 1.50x, MARC considers DRIRM's cash flow coverage metrics to be insufficient to maintain the current ratings of the Sukuk. The sukukholders have also agreed to a reduction in the monthly lease payments made by MHSA to DRIRM, the impact of which will weaken the cash flow coverage metrics on a sustained basis.
MARC understands that MHSA's bankers have completed the buyback of the outstanding Sukuk and that the Sukuk will be retired from the proceeds of a new bond issue. The rating agency further notes that MHSA has raised additional bank borrowings to cover its liquidity needs in respect of aircraft acquisition and to service its new contract. MARC expects to resolve the MARCWatch within the next three months, during which time it will closely monitor developments in MHSA's finance restructuring exercise.
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