Published on 08 Oct 2020.
RAM Ratings has revised the outlook on the rating of TRIplc Medical Sdn Bhd’s (TMSB or the Company) RM639 mil Senior Sukuk Murabahah (the Senior Sukuk) to negative, from stable. The revision is premised on weakening debt service coverage of TMSB with almost a year of expected lost earnings arising from the delayed completion of its project. The negative outlook also reflects uncertainty when the project will be completed and if there will be any cost overrun.
The reaffirmed AA1 rating remains anchored by a four-year irrevocable and unconditional Al-Kafalah Facility of up to RM639 mil, including one profit payment provided by Danajamin Nasional Berhad (AAA/stable/P1) and Bank Pembangunan Malaysia Berhad (AAA/stable/P1). The guarantee is valid during the project’s construction phase and will expire on 22 October 2021. The Al-Kafalah Facility enhances the credit profile of the Senior Sukuk beyond TMSB’s stand-alone credit strength during the construction phase.
The construction of a teaching hospital and an academic complex on UiTM’s campus in Puncak Alam, Selangor (the Project) had originally been due for completion by 10 April 2020. Following the formal extension of time (EOT) granted on 19 May 2020 (until 10 October 2020, known as EOT1) and on 6 October 2020 (until 1 February 2021, known as EOT2), the Project is expected to be 10 months delayed from the original completion date.
The Project was 94.71% completed as at 10 July 2020 (compared to the scheduled progress of 99.91%). However, critical components related to the construction and commissioning of a hospital - such as testing and commissioning of medical equipment – is ongoing. While initial delays had been due to setbacks in obtaining approval from government bodies, the three-month halt in construction work during the various stages of the movement control order (MCO) had exacerbated the situation.
During the Project’s construction phase, the Company is reliant on the Sukuk’s unutilised issuance proceeds boosted by its interest income earned from the last three years, to support its outstanding construction related costs, administrative as well as setting up costs and Sukuk profit payments up to April 2021 (base case: able to service profit payments up to October 2021). Should the Project remain incomplete by early 2021, the Senior Sukuk’s rating will be reassessed. The severity of any downward rating pressure will depend on the extent of delays. Any rating movement will consider the Senior Sukukholders’ decision to make a claim on the Al-Kafalah before 22 October 2021.
RAM assumes that the Project will be wrapped up by 10 April 2021, in line with the original request under EOT2, with no cost overruns and a three-month payment delay from UiTM. Under this stressed scenario, TMSB’s minimum FSCR, calculated with cash balances on every payment date, will dip below the minimum requirement of 1.65 times that is needed to preserve the Senior Sukuk’s AA1 rating. Under RAM’s stressed analysis, the FSCR is expected to come in at a minimum of 1.38 times in October 2024 (average of 1.80 times), which aligns with the benchmark FSCR of an AA3-rated complex PFI/PPP project (base case: minimum 1.65 times, average 1.91 times). The management is determined to complete the Project by early 2021 while saving RM11 mil of costs. If successful, the early completion and savings will translate into RM24 mil additional cash, lifting the Company’s FSCRs above 1.65 times. As the Project’s progress remains fluid, RAM will monitor and reassess the Senior Sukuk’s rating in early 2021.
Compared to other PFI/PPP projects, the construction and maintenance of a hospital is technically more challenging as it involves the installation of medical equipment, plus the integration and functioning of equipment with extensive mechanical and engineering works. Notably, TMSB has taken precautionary measures by contracting experienced parties during the construction phase and ensuring proper hospital and equipment maintenance once completed. As at 28 September 2020, TMSB had taken delivery and installed medical as well as ICT equipment while testing and commissioning is ongoing.
As with other concession-based projects, TMSB is exposed to single-project and regulatory risks. During the construction period, the Senior Sukukholders will be protected by the Al-Kafalah facility in the event of termination due to default by TMSB.
Irfan Afifah Mohd Zaki
(603) 3385 2551
Davinder Kaur Gill
(603) 3385 2525
(603) 3385 2577
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Published by RAM Rating Services Berhad
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Ratings on TRIplc Medical Sdn Bhd