[MARC] MARC assigns rating of AA-IS to Konsortium KAJV's RM1.0 billion Sukuk Wakalah Programme - 16 Jul 2019

Posted Date: July 16, 2019

MARC has assigned a rating of AA-IS to Konsortium KAJV Sdn Bhd's (KAJV) RM1.0 billion Sukuk Wakalah Programme with a stable outlook. The assigned rating reflects the credit strength of the Terengganu state government to meet the unconditional and irrevocable payment obligations on the Facility Payment Certificates (FPC) issued for work done for the Kuala Terengganu Utara (KTU) water supply project. MARC maintains a sub-sovereign credit rating of AA-/Stable on Terengganu, premised on the state's general creditworthiness which is underpinned by oil royalty payments and the expected continued economic and financial support from the federal government. The stable outlook incorporates the sufficient protection provided to sukukholders through the financing structure throughout the tenure of the sukuk.

KAJV is a single-purpose company owned by Serba Dinamik Sdn Bhd (40%), FASK Holding Sdn Bhd (35%) and Mirmas Holding Sdn Bhd (25%). KAJV was awarded a design-and-build contract for a 120-million litres per day (MLD) conventional water treatment plant (WTP) and a 28-MLD membrane WTP as well as related facilities that include retrofitting, refurbishing and rehabilitating five existing WTPs in Kuala Terengganu, to a combined full capacity of 300 MLD. The proceeds from the sukuk issuances will largely fund the RM797 million construction cost for the WTPs and related facilities for the KTU water supply project.

Consisting of two phases - a four-year construction phase and a 12-year deferred payment phase - the construction phase will end in May 2020 with the deferred payment phase commencing the following month, in June 2020. The overall project will be handed over to the state government upon completion of the construction phase. MARC notes that KAJV has completed 28.6% of works against the scheduled 41.5% as at May 25, 2019. The delay has been attributed to the requirement to construct an additional distribution unit at one of the WTP sites and administrative issues on pipeline construction. The company expects construction progress to be in line with the scheduled progress by November 2019.

Notwithstanding the construction delays, sukukholders will not be exposed to construction risk as each tranche of sukuk will only be issued upon availability of the FPCs issued by the state government for partial completion of work under the contract. The FPCs will be issued upon sectional completion of works under the contract and structured to match 12 annual deferred payments from the state government of RM108.8 million each. The FPCs represent unconditional and irrevocable obligations on the state government to pay the approved sum on stipulated payment dates on the certificate notwithstanding any delay in the full completion or cancellation of the project resulting from a breach by either party. MARC views the project's construction risk is fully mitigated by the financing structure.

Completion and cost overrun risks during the project's construction phase will largely be allocated to the contractors, namely Serba Dinamik Sdn Bhd, Salcon Engineering Berhad and Mirmas Holding Sdn Bhd, under fixed-price contracts.

Cash flow projections indicate that KAJV would achieve minimum and average financial service cover ratios (FSCR) of 1.58x and 2.15x during the tenure of the sukuk against the covenanted FSCR of 1.25x. The requirement to maintain a minimum balance equivalent to the next one profit payment for each tranche of sukuk in the finance service reserve account throughout the tenure of the sukuk enables cash reserves to meet the sukuk's scheduled profit.

Contacts:
Sim Jun Da, +603-2717 2948/ simjunda@marc.com.my
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my