Published on 24 Dec 2019.
RAM Ratings has assigned a AA1/Stable rating to SEP Resources (M) Sdn Bhd’s (SEP or the Company) RM150 mil Islamic MTN (the Sukuk) premised on the sound project fundamentals of its concession asset held via its subsidiary, Budaya Positif Sdn Bhd (Budaya Positif). The rating is also supported by strong debt coverage indicators backed by transaction covenants, limitations and restrictions to minimise risk of cashflow leakage.
Budaya Positif, a wholly owned subsidiary of SEP, holds a 22.5-year concession for the development and maintenance of student hostels for Universiti Malaysia Perlis (Unimap) in Padang Siding, Perlis (the Project). The concession agreement with Unimap and the Government of Malaysia (GoM, via the Ministry of Higher Education Malaysia) was inked on 25 January 2013. The construction of the hostels was completed with the Certificate of Acceptance issued on 1 June 2017.
Since then, Budaya Positif has been promptly receiving monthly Availability Charges (AC) and Maintenance Service Charges i.e. within an average 31 days from invoice date. Its performance track record has been commendable. Deductions for non-performance have been negligible up to end-July 2019. The average KPI achievement of 95% each month surpasses the 70% requirement under its concession. Maintenance is undertaken by a related entity of SEP, i.e. Pesona Asset Management Sdn Bhd, via a 20-year Asset Management Services Contract.
Based on RAM’s cashflow analysis, which only considers AC, SEP is projected to register a minimum annual finance service coverage ratio (FSCR) of 1.79 times (with cash balances and calculated in payment months) throughout the tenure of the Sukuk (base case: 1.87 times).
SEP is entirely dependent on cashflow from Budaya Positif (in the form of repayment on Murabahah Stocks and advances). The proceeds from the RM150 mil Sukuk will be utilised to subscribe for Murabahah Stocks (unrated) issued by Budaya Positif – its only permitted indebtedness during the tenure of the Sukuk –after repayment of outstanding loans and advances. Furthermore, the residual money in the designated accounts under Budaya Positif (after repayment of the Murabahah Stocks) is to be channeled to SEP at least every half-yearly from the issuance date of the Sukuk. Accordingly, we have consolidated the various cashflows and have treated them as a single economic entity for our rating purposes.
Meanwhile, tight financing terms, limitations and restrictive covenants imposed on SEP (as Issuer), Budaya Positif (as key source of cashflow) and Pesona Metro Holdings Berhad (Pesona Metro, majority shareholder of SEP) minimise cashflow leakage risk and ensure alignment of interests among the sukukholders and shareholders. The undertaking provided by SEP’s two other shareholders who hold the remaining 30%-stake, to recognise and acknowledge the terms of the Sukuk add further comfort. The terms of the Sukuk prohibit SEP from making any further payment to its shareholders or assuming any additional loan. Budaya Positif will also not be allowed to take on any further debt. Any risk of excessive operational and capital expenditure is mitigated as any amount above 5% of the cashflow projections submitted to the Sukuk Trustee and RAM before the issuance of the Sukuk will be subject to approval from the Sukuk Trustee. SEP’s designated accounts will be managed by the Security Trustee, who will also solely manage Budaya Positif’s Collection Account, in accordance with the cashflow waterfall under this transaction.
On the contrary, the GoM has no direct obligation to SEP’s lenders. This exposes the transaction to the risk of concession termination. If Budaya Positif’s concession were to be terminated, the compensation from Unimap will not protect the sukukholders as it only covers loans to fund construction. Termination due to non-performance by Budaya Positif is deemed unlikely due to the generally low complexity of maintenance work. Termination due to default by Unimap is also deemed unlikely, although in such an instance Unimap will pay Budaya Positif the present value of the AC through the remaining concession period, discounted at the weighted average cost of capital.
The corporate guarantee extended by Pesona Metro may provide some financial relief to the sukukholders under a termination scenario. In this regard, Pesona Metro’s financials are deemed healthy, as reflected by its FFO debt coverage ratio of 0.31 times (end-December 2017: 0.27 times). As at end-December 2018, the Group’s total debt stood at RM132.59 mil.
SEP is 70%-owned by Pesona Metro, a mid-sized construction, manufacturing and trading company in Malaysia. The Group is listed on the Main Market of Bursa Malaysia; its primary shareholders are two brothers, Wie Hock Beng and Wie Hock Kiong. Pesona Metro’s acquisition of SEP in 2017 marked its foray into the concession business and facilities management.
Davinder Kaur Gill
(603) 3385 2525
Yip Chee Meng
(603) 3385 2516
(603) 3385 2577
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Ratings on SEP Resources (M) Sdn Bhd