Published on 19 Jun 2020.
RAM Ratings has reaffirmed the AA1/Stable rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 bil Sukuk Murabahah. ESSB is the concessionaire for the development of 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept. These quarters were completed in December 2003 and handed over to the Government of Malaysia (GoM) in early 2004, in fulfilment of the Company’s obligations under a Privatisation Agreement dated 9 February 1998. ESSB is not obligated to maintain the facilities.
The reaffirmation of the rating is premised on the Company’s robust debt-servicing aptitude, backed by the tight transaction structure and highly predictable inflow of monthly concession payments. As of the last principal repayment month of November 2019, ESSB recorded a finance service coverage ratio (FSCR, with cash balances, calculated over a 12-month period, on payment month) of 1.70 times – in line with the required 1.50 times to maintain its rating and higher than RAM’s projected 1.57 times, thanks to a shorter-than-expected receivables cycle and healthier investment returns. That said, we envisage lower investment income in the future following the relatively recent interest rate cuts by Bank Negara Malaysia. Nonetheless, our analysis indicates that ESSB will record minimum and average FSCRs of a respective 1.57 and 1.64 times throughout the remaining tenure of the Sukuk.
ESSB receives monthly concession payments from the GoM via the Ministry of Education. These are not conditional on the Company’s performance as it is not required to maintain the teachers’ quarters. As such, its operating expenses are minimal. Despite facing minimal counterparty risk as the GoM is the ultimate paymaster, ESSB’s debt-servicing ability remains susceptible to payment delays as it relies solely on these payments to service the Sukuk. We note that payments were received regularly and within an average of 35 days in 2019 – within our sensitised assumption of a three-month delay.
As the last tranche of the Sukuk will mature three months after the expiry of the concession in February 2028, the short intervening period does not provide any buffer against potential refinancing or restructuring, should the need arise. Nonetheless, the concession payments from the GoM are anticipated to sufficiently meet the Sukuk’s repayment.
We also derive comfort from ESSB’s predictable expenditure – which mostly relates to administration costs – and the strict covenants that limit the possibility of cashflow leakages. These include the prohibition of dividend distributions while the Sukuk remains outstanding, and limitations on the Company’s activities as well as the incurrence of additional debt. Based on our stressed projections, the Company’s cash balances after its final principal repayment should afford a buffer of approximately seven months’ contractual payments from the GoM.
Davinder Kaur Gill
(603) 3385 2525
(603) 3385 2577
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Ratings on Encorp Systembilt Sdn Bhd