Published on 11 May 2021.
RAM Ratings has assigned a final rating of AAA/Stable to Sabah Development Berhad’s (SD Bhd or the Group) proposed Islamic Medium Term Notes Programme of up to RM10 bil (the Proposed Sukuk). In doing so, we have reviewed the relevant final transaction documents. We find them to be in line with our expectations when the preliminary rating was assigned (published on 16 November 2020).
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. SD Bhd was set up in 2015 as a direct wholly owned entity of the Sabah state government. The Group serves as a proxy funding vehicle for the Sabah state government, acting as a lender or investor in major socio-economic development projects in Sabah.
SD Bhd’s importance is also underlined by Sabah International Petroleum Sdn Bhd’s (SIP, a wholly owned subsidiary of SD Bhd) instrumental role in driving the State’s ambitions within the upstream O&G industry, as the sole state-owned vehicle in this sector. 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 earnings for the benefit of the State.
With the planned sukuk issuance, SD Bhd’s financial profile is expected to weaken considerably. Apart from funding various development projects, SIP is bidding 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 cash flow debt coverage levels are envisaged to stay weak, at below 0.1 times due to its projected incremental debt.
The Finance Service Reserve Account (FSRA) requirement under the transaction terms moderates liquidity risk. SD Bhd has represented that sukuk issuances will initially be capped at RM3 bil. Confirmation from RAM that the rating will not be adversely affected is among the conditions precedent for cumulative outstanding issuances beyond RM3 bil under the Sukuk Programme.
1SD Bhd’s consolidated financial statements for FY Dec 2020 are not available as of the date of publication.
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