Published on 11 Jan 2021.
RAM Ratings has reaffirmed the AA3/Stable rating of Dynasty Harmony Sdn Bhd’s (DHSB) RM165 mil Islamic Medium-Term Notes (IMTN) (2018/2033) under its RM300 mil IMTN Programme (2018/2036). To service its financing, DHSB (a funding vehicle) relies exclusively on residual cashflow from KP Mukah Development Sdn Bhd (KP Mukah) in the form of fixed quarterly dividends, after the latter has met its own operational and financial commitments.
KP Mukah holds the 23-year concession agreement (CA) for the development and maintenance of a campus for Universiti Teknologi MARA (UiTM) in Mukah, Sarawak (the Project). Global Facilities Management Sdn Bhd (GFM) is the maintenance service provider. DHSB, KP Mukah, and GFM are wholly owned by GFM Services Berhad, a leading provider of integrated facilities management and consultancy services.
The reaffirmed rating is premised on the transaction’s stable cashflow, adequate liquidity and solid finance coverage. During the reviewed period, KP Mukah promptly received fixed monthly availability charges from its strong counterparty, i.e. the Government of Malaysia (GoM), through UiTM. That said, we note delays in the receipt of monthly maintenance service charges (MSCs) – inflows related to the maintenance and upkeep of the Project - as well as deductions of 13.25% in 2019 and 13.78% in 9M 2020 (albeit within RAM’s stressed assumption of 15%). While we understand two months of MSC payments have been withheld and under deliberation, the financial impact on KP Mukah (net of costs) has been minimal to date as the amounts deducted/withheld have been subtracted from monthly payments to GFM.
As at end-December 2019, KP Mukah’s finance service coverage ratio (FSCR) stood at 1.96 times (against RAM’s projected 1.62 times) while DHSB’s sub-FSCR came in at 1.73 times (projected: 1.51 times). These were supported by a steady RM44.83 mil of pre-financing cashflow from KP Mukah (fiscal 2018: RM41.35 mil). The outperformance was mainly due to higher working capital. Based on RAM’s analysis, KP Mukah’s FSCR (with cash balances and calculated in payment months) is envisaged to remain steady at a minimum of 1.71 times while DHSB’s sub-FSCR (with cash balances and calculated in payment months) ought to come up to at least 1.45 times throughout the tenure of the IMTN.
The IMTN is subordinated from the cashflow waterfall and security angles to KP Mukah’s operational and financial liabilities. The single largest debt at KP Mukah level is a loan from Bank Pembangunan Malaysia Berhad (BPMB). The IMTN holders will only be entitled to profit payments in the first 10 years while principal repayment will begin in December 2028, after the full redemption of the BPMB facility. Nonetheless, KP Mukah and DHSB are closely aligned from a credit perspective as the former is the sole source of repayment for the financing obligations of BPMB and DHSB. Meanwhile, a tight financing structure and restrictive covenants for KP Mukah and DHSB (including no additional loans, limits on cost increases, and operation of designated accounts by the security trustee) minimise potential cashflow leakage.
The rating is moderated by potentially volatile profit rates due to KP Mukah’s floating-rate liabilities. The transaction is also exposed to the risk of CA termination, which may arise if deductions exceed 25% of the monthly asset-management service charges for three consecutive months. This is, however, deemed unlikely owing to the low-to-moderate complexity of the maintenance work. Should termination occur, compensation from the GoM will not cover the IMTN as it will only address the outstanding amount under the BPMB facility.
Liew Kar Ling
(603) 3385 2586
(603) 3385 2577
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
Published by RAM Rating Services Berhad
© Copyright 2021 by RAM Rating Services Berhad
Ratings on Dynasty Harmony Sdn Bhd