Published on 16 Nov 2020.
RAM Ratings has assigned a preliminary rating of AAA/Stable to Sabah Development Berhad’s (SD Bhd or the Group) proposed Islamic MTN Programme of up to RM10 bil (the Proposed Sukuk). The rating is premised on SD Bhd’s highly strategic and important role to the Sabah state government (the State), and our expectation that extraordinary support from the State will be forthcoming if needed. Based on RAM’s rating methodology for government-linked entities, SD Bhd is considered a dependent entity and the Group’s rating is equated to that of Sabah.
SD Bhd was incorporated in 2015 as a wholly owned entity of the Sabah state government, to facilitate the internal restructuring of Sabah Development Bank Berhad (SDB). The exercise had been undertaken to demerge SDB’s non-core operations (mainly oil and gas (O&G), water utilities and property investment) from its core business of financial services. All these non-financial services-related business segments are now housed under SD Bhd.
Since then, SD Bhd’s role has expanded to include being the State’s funding vehicle and investment arm. Together with its subsidiary, SDB, the Group aims to serve as a lender or investor in major socio-economic development projects in Sabah. To this end, SD Bhd has secured a money-lending licence from the Sabah State Ministry of Finance, which will allow the Group to channel its sukuk proceeds to strategic developmental projects to be identified by the State.
SD Bhd’s importance to Sabah is also underlined by Sabah International Petroleum Sdn Bhd’s (SIP, wholly owned by SD Bhd) participation in the oil and gas (O&G) sector. SIP is the sole Sabah state-owned vehicle in the upstream O&G sector and is identified as the entity to spearhead the State’s O&G ambitions. SIP currently has interests in O&G exploration and production and is a provider of floating production storage and offloading (FPSO) vessels to the offshore O&G industry. While these operations are commercially driven, they provide additional revenue sources for the benefit of the State.
SIP is also the custodian of O&G assets that are strategically important to the State. National oil giant Petronas has earlier offered Sabah and Sarawak a 10% interest each in Petronas LNG 9 Sdn Bhd, at a discounted price. SIP, as the entity appointed by the State, completed the acquisition of a 5% stake in Petronas LNG9 in May 2019. SIP is likely to exercise its irrevocable call option to purchase the remaining 5% interest sometime next year.
With the planned sukuk issuance, SD Bhd’s financial profile is expected to weaken considerably. Apart from funding various development projects, SIP is currently participating in a bidding exercise for the provision of a FPSO facility for Petronas Carigali’s Limbayong O&G field development off the shores of Sabah. Assuming a RM3 bil increase in debt through the next three years (2021-2023), SD Bhd’s gearing ratio is expected to rise to 2.0-2.5 times (after analytical adjustments) (end-December 2019: 1.1 times). Likewise, the Group’s funds from operations and operating cash flow debt coverage levels are envisaged to stay weak, at below 0.1 times due to its projected incremental debt. We do not expect any meaningful cashflow from potential investments (e.g. the Limbayong vessel charter and other state-related projects) anytime soon.
As at end-December 2019, SD Bhd’s company-level cash reserves amounted to only RM1.2 mil. That said, its company-level liquidity risk is moderated by the requisite minimum Finance Service Reserve Account (FSRA) balance to cover one profit payment under the transaction documents. The FSRA balance will be pre-funded by proceeds from the Proposed Sukuk. SD Bhd has represented that issuances under the Proposed Sukuk will initially be capped at RM3 bil. Conditions precedent for cumulative outstanding issues beyond RM3 bil under the Proposed Sukuk include confirmation from RAM that the rating will not be adversely affected.
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