KUALA LUMPUR (Feb 3): ENCORP BHD []’s unit Encorp Systembilt Sdn Bhd has proposed to issue up to RM1.575 billion (2012/2028) in Islamic debt notes, bulk of which would be used to refinance the outstanding amount on its debt notes.
RAM Rating Services Bhd said on Friday it had assigned preliminary AA2 rating to Encorp Systembilt’s proposed Sukuk Murabahah of up to RM1.575 billion. The long-term rating carries a stable outlook.
To recap, Encorp Systembilt is the concessionaire for the building of 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept.
It issued Al-Bai’ Bithaman Ajil notes issuance facility (ABBA notes), raising proceeds of about RM1 billion to fund the CONSTRUCTION [].
All 10,000 units were eventually completed and handed over to the government in early 2004, under the privatisation agreement. In return, the government would make monthly concession payments to Encorp Systembilt, with effect from the month following the issuance of the certificate of practical completion for each cluster of units, until the expiry of the 30-year concession in February 2028.
“Proceeds from the proposed Sukuk Murabahah will be used to refinance the outstanding amount on Encorp Systembilt’s existing ABBA Notes (up to RM1.5 billion), to fund the trustees’ reimbursement account and the balance shall be utilised for the company’s general corporate purposes,” it said.
RAM Ratings said the rating of the proposed Sukuk Murabahah reflected the stream of highly predictable and contractually-backed concession payments from a strong counterparty, that is the government through the Ministry of Education.
The rating agency noted the government demonstrated a track record of regular payments to the company since November 2006, with monthly instalments received within one to two months from the invoice dates.
“Backed by this stream of monthly payments, we expect Encorp Systembilt to register a stressed minimum finance service cover ratio (FSCR) of 1.20 times. In addition, the company does not face any performance or operating risks as its obligations under the privatisation agreement have already been fulfilled and it is not required to operate the quarters,” it said.
RAM Ratings pointed out Encorp Systembilt’s debt-servicing ability was also safeguarded by the transaction’s tight structure and covenants, which minimise cashflow leakage.
These include limits on the company’s activities and the incurrence of additional debt. The company is also not permitted to declare or pay any dividends during the tenure of the proposed Sukuk Murabahah, except for a one-time inter-company loan and/or dividend payment to its holding company and/or ultimate holding company from the proceeds of the proposed Sukuk Murabahah.
The Escrow Account – one of the designated accounts to be opened by Encorp Systembilt – will capture, amongst others, the monthly concession payments from the Government; this account will be operated solely by the security trustee and pledged to Sukuk holders as security.
“However, Encorp Systembilt’s debt-servicing ability is vulnerable to any material delay in disbursement of concession payments as it relies solely on the monthly instalments to service its proposed Sukuk Murabahah. As such, the possibility of future delays cannot be entirely discounted,” said RAM Ratings.
The last tranche of the proposed Sukuk Murabahah is expected to mature after the end of the concession period.
RAM Ratings said assuming that the proposed Sukuk Murabahah is issued on April 1, 2012, the last tranche of the proposed Sukuk Murabahah is expected to mature on April 1, 2028, that is after the concession expires on Feb 9, 2028.
It noted that the repayment of the proposed Sukuk Murabahah was, however, well supported by the accumulated funds in the escrow Account.
“Under our stressed scenario, the Company’s cash reserves after the redemption of the proposed Sukuk Murabahah are estimated to come up to RM24.84 million (as at April 2028),” it said.
