[RAM] RAM Ratings reaffirms Encorp Systembilt's AA1 sukuk rating

RAM Ratings has reaffirmed the AA1/Stable rating of Encorp Systembilt Sdn Bhd’s (Encorp or the Company) RM1.575 bil Sukuk Murabahah. Encorp’s robust debt servicing ability will be sustained by a steady inflow of monthly concession payments and the Company’s strong cash reserves, backed by its transaction structure and restrictive covenants. 

Encorp is the concessionaire for the development of 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept. The quarters were completed and handed over to the Malaysian government in early 2004. In exchange, Encorp is entitled to monthly concession payments. These are not subject to performance-related deductions as the Company is not required to maintain the facilities.

Encorp faces minimal counterparty risk, given that the government is the ultimate paymaster, although the Company’s debt servicing ability remains vulnerable to delays in concession payments, which it relies solely on to meet its obligations under the Sukuk. The Company’s finance service coverage ratio (FSCR, with cash balances, calculated over a 12-month period, on payment month) was 1.84 times in the most recent principal repayment month of November 2021. The ratio exceeded RAM’s projection of 1.59 times, supported by timely payments, well-within our stressed assumption of a three-month delay. 

Moving forward, we expect Encorp to register minimum and average FSCRs of 1.55 times and 1.65 times, respectively, throughout the Sukuk’s tenure (base case: 1.54 times and 1.89 times), commensurate with the 1.50 times required for an AA1 rating. Our stressed assumptions include a three-month delay in the receipt of concession payments and lower reinvestment income. 

Due to Ministry of Finance certification requirements, Encorp had sought sukukholders’ approval to raise the payment limit for administrative expenses from RM700,000 to RM1.4 mil per annum to address the higher-than-budgeted payroll expenses. While the request was rejected, any expense shortfall will be met by its ultimate parent company, Encorp Berhad. Given the shareholder’s willingness to support, we view this event to be neutral from a credit perspective. 

As the last tranche of the Sukuk will mature three months after the concession expires in February 2028, the short intervening period leaves no headroom for refinancing or restructuring, should the need arise. Nonetheless, concession payments from the government are anticipated to sufficiently meet repayments of the Sukuk. Based on our stressed projections, Encorp’s cash balances after the final principal repayment should provide a buffer of approximately seven months’ contractual payments.

If Encorp’s Privatisation Agreement with the government is terminated due to a default by the Company – a risk which is deemed remote – it will still be entitled to monthly payments for the rest of the concession term. 

Analytical contacts
Zachary Tan
(603) 3385 2612

Davinder Kaur Gill
(603) 3385 2525