The RM600 million ($190 million) Islamic sukuk refinancing for the Trans-Thai Malaysia pipeline is the first Islamic issue by a Thai borrower, and achieved impressively low pricing and long maturity. Despite these terms, it may not spark additional issuance by other Thai infrastructure issuers. But it stands out as a landmark for regional sukuk issuance.

The sponsors of the pipeline are Thai­land’s national oil company, PTT Public Company, and its Malaysian counterpart, Petroliam Nasional, or Petronas, each with a 50% stake. The issuer is a Thai issuer, Trans Thai-Malaysia (Thailand), which owns the pipeline, though the financing is governed by Malaysian law, in deference to Malaysia’s vibrant Islamic finance market.

The pipeline, began operations on a first section in 2006, serves a joint de­velopment zone shared by Malaysia and Thailand, and runs 277km from offshore producing areas in the 7,250km2 zone to a gas separation plant at Chana in Song­khla province, Thailand. Construction of the first phase was funded in part with roughly $250 million in bank debt from Barclays Capital.

The cost of the entire pipeline runs to roughly $2.5 billion, but the sukuk issue finances a phase 2 of the pipeline, which runs 50km between the A-18 and B-17 producing blocks. Construction of the first phase was funded in part with roughly $250 million in bank debt from Barclays Capital. Sponsor loans funded construction of the second section, which began operations in June 2010.

The credit of the project is comparatively straightforward, based on take-or-pay shipping contracts with PTT. The pipe­line has an outsize importance to both sponsors, accounting for 17% of Penin­sular Malaysia’s gas demand, and roughly 18% of Thailand’s demand. These funda­mentals were major factors in Malaysia Ratings Corporation’s decision to assign a AAA(is) rating to the sukuk.

The deal, led by CIMB and HSBC, went to market following a period of political instability in Thailand, though by November, when the deal came to market, the situation was much calmer. Nevertheless, Malaysia’s sukuk investor base was being asked to take on the structured risk of a foreign state-owned issuer. At the same time, the project allowed investors to diversify from domestic corporates and projects, and a time when activity in Malaysia’s energy and infrastructure capital markets was comparatively subdued.

The project benefitted from Petronas’ ownership, and the rating of PTT, not to mention low leverage. The first five years of the bonds involve interest payments only, and during this period the average finance service coverage ratio (FSCR, equivalent to debt service coverage ratio but taking into account Islamic sensi­bilities) is of 4.61x, though this declines to 1.27x once principal repayment begins. The bonds mature at various points between 2015 and 2025.

Protections for sukuk investors include a restricted payments test, with cash trapped if the FSCR is lower than 1.1x, and a finance service reserve account. The account has been sized to cover six months of profit payments on the sukuk and 50% of the next principal payment. Payments are also restricted if this account is not fully funded. Gearing is also restricted to 70%.

But the project is subject to considerable foreign exchange risk, because pro­ject revenues are in dollars and baht, while sukuk payments are in Malaysian ringgit. The shareholder loans that fund­ed phase 2 were denominated in dollars, because the two national oil companies had ready access to dollar. The phase II financing also cross defaults with the phase 1 debt, and there are close oper­ational linkages between the two phases. So while cashflows for debt service are phase 2-specific, covenants are at the TTM level.

The sukuk is structured as a com­mod­ity murabahah, a familiar instrument to Islamic investors. There are few regional templates for the use of Islamic debt on oil and gas assets, with the nearest pre­cedent being the istisna facility that Brunei Gas Carriers closed for its liquefi­ed natural gas carrier assets in 2008. Another forerunner, the East Cameron gas securitisation sukuk, ended in bank­ruptcy court in 2009.

But Trans-Thai Malaysia is a much stronger prospect, with a much stronger pair of sponsors. The all-in cost of fin­anc­ing is believed to be nearer 6% than an initially rumoured 4%, but still stacks up competitively with project debt, even with the foreign exchange risk. PTT also has the chance to broaden its investor base.

The sponsors’ hope when the deal closed was that the financing might open the Malaysian sukuk to a larger number of Thai issuers, though there have been no follow-ups and other sponsors will have a much harder time accessing the market. In regional terms few other names can match the cachet of PTT and Petronas. But if Thailand can build upon its tenuous period of political calm other issuers might have a shot. 

Trans Thai-Malaysia (Thailand) Limited
Status: Closed 15 November 2010
Size: $2.5 billion (total project cost)
Location: Thailand and Malaysia joint development zone
Description: Sukuk refinancing of 50km phase 2
Sponsors: PTT and Petronas (each 50%)
Offtaker: PTT
Sukuk: RM600 million ($190 million) commodity murabahah
Joint lead managers and bookrunners: CIMB and HSBC
Legal advisers to the bookrunners: Wong & Partners (Malaysia) Baker & McKenzie and Wong & Leow (Thai) Baker & McKenzie (English)
Legal advisers to issuer: Chandler and Thong-Ek (Thai), Adnan, Sundra & Low (Malaysia) Ashurst (English)
Insurance adviser: Sterling