JCR-VIS Credit Rating Company Limited has assigned preliminary rating of `A’ (Single A) to the proposed TFC/Sukuk issue of Rs 2.5 billion of Shaheen Air International Limited (SAI). Outlook on the assigned rating is `Stable’. The airline industry in developed countries is characterized by stiff competition , with nominal growth in air traffic projected, going forward, a release said on Thursday. As per independent estimates, air traffic in Pakistan is projected to witness healthy growth which supports the prospects of growing revenues for airliners. SAI has been operating for the last 20 years, the institution is undergoing a transition phase whereby it is expanding its fleet of aircraft that are acquired on dry lease and is expanding the scale of its operations. Noteworthy growth in revenues has been observed in FY13 and HY14; with unproved margins on the back of better fuel efficiency, this has translated into healthy profits and cash flows. Fleet size is projected to double by FY15 with the company planning to operate up to 29 new routes. The company is planning to issue TFC/Sukuk of Rs 2.5 billion . Besides down payment for lease of new aircraft, proceeds from the TFC issue are planned to be utilized for working capital financing and repayment of bridge loan obtained for leasing aircraft, Principal repayments commence after one year and are structured in 16 stepped-up installments. SAI shall create first exclusive charge: over the receivables from the Saudi Arabian routes in favor of the trustee to be appointed for this purpose. Given historical trends, the volatility in business volumes on these routes may not be significant. Moreover, for the third consecutive year, the company has received quota for Hajj operations. Risk factors include seat factor, continuity of hajj quota from the government and ability to pass on cost increase, mainly in fuel prices, to customers. These factors will remain important for adequate debt service coverage and will be tracked vis-a-vis projections. Payments to the TFCs holders shall be made: from collection of revenues from the Saudi Arabia routes, In case of any shortfall, the cash collection agent would have irrevocable instructions to divert cash flows from the Oman & Kuwait routes to Saudi Arabia collection account. SAI will be required to seek consent of the Trustee prior to creation of any charge on the cash flows from Oman and Kuwait routes. The priority of payment from the receivables collection is to TFCs holders first. From the proceeds of the TFC issue, the trustee will set aside Rs 195 million up front in the Debt Service Reserve Account (DSRA), which may be invested in risk free government securities. One month before the due’ date of each installment, the DSRA would start accumulating the upcoming installment such that the DSRA has the Rs 195 million initially set aside and the upcoming installment in full two days prior to the payment date. Collection agent would have irrevocable instructions from the company for the accumulation of cash in DSRA. The proposed TFC/Sukuk will also be secured by a charge on the fixed assets of the: company, including the grounded aircraft and related parts and the hangar.
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