Published on 30 Sep 2020.
RAM Ratings has reaffirmed the AA1/Stable rating of SEP Resources (M) Sdn Bhd’s (SEP or the Company) RM150 mil Islamic MTN (2019/2030) (the Sukuk). This is premised on the stable concession-backed cashflows which anchors its debt coverage metrics, with projected minimum and average finance service coverage ratios (FSCRs) of 1.72 and 2.16 times, respectively. SEP is an intermediate holding company with no business on its own and depends entirely on the concession-backed cashflow from its wholly owned subsidiary, Budaya Positif Sdn Bhd (Budaya Positif).
The proceeds from the Sukuk had been utilised to fully subscribe for the unrated Murabahah Stocks issued by Budaya Positif. This had, in turn, been used by Budaya Positif to repay its outstanding loans and advances. The Murabahah Stocks have been structured to match the annual principal and profit payments on the Sukuk.
Budaya Positif continues to receive prompt payments of monthly Availability Charges and Maintenance Service Charges (MSCs) from Universiti Malaysia Perlis (Unimap), via its 22.5-year concession for the development and maintenance of student hostels for Unimap in Padang Siding, Perlis (the Project). These timely cashflows underpin SEP’s strong debt-servicing aptitude, while the remaining cash balances in the designated accounts of Budaya Positif (after the repayment of the Murabahah Stocks) are channelled to SEP every six months through advances.
In 2019, Budaya Positif scored an average 88% on its key performance indicators (KPIs) (2018: 95%). Budaya Positif has maintained the Project well since the commencement of the concession, achieving respectable KPIs. The drop in its 2019 KPI score is mostly attributable to several non-compliances that had led to minimal deductions on the MSCs. Unimap’s payment track record has stayed commendable in 2019 with an average payment cycle of 29 days (2018: 26 days) against our assumption of three months. The transaction also faces low counterparty risk as the Government of Malaysia via the Ministry of Higher Education, is the ultimate paymaster.
The transaction’s credit strength is further supported by its restrictive covenants and financing terms. Both SEP and Budaya Positif are prohibited from assuming any additional debt, aside from the Sukuk and the Murabahah Stocks. The risk of excessive annual operating and capital expenditure is also mitigated as any amount above 5% of the projected cashflow submitted to the Sukuk Trustee and RAM before the issuance of the Sukuk will be subject to the approval of the Sukuk Trustee.
Meanwhile, the rating is moderated by the transaction’s highly leveraged capital structure and termination risk. Despite SEP’s heavy debt load, RAM places more emphasis on the transaction’s cash-generating ability. Termination of the concession due to non-performance by Budaya Positif is unlikely due to the generally non-complex maintenance of the Project.
The operation and maintenance of the Project have remained uninterrupted during the various stages of the movement control order (MCO). Apart from the standard operating procedures, the facility must also adhere to the Ministry of Health’s measures to prevent the spread of COVID-19. These present minimal obstruction to the Project’s usual maintenance work.
SEP is 70%-owned by Pesona Metro Holdings Berhad, a mid-sized construction, manufacturing and trading company listed on Bursa Malaysia.
Yip Chee Meng
(603) 3385 2516
(603) 3385 2577
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Ratings on SEP Resources (M) Sdn Bhd