Published on 21 May 2021.
RAM Ratings has reaffirmed the AA1/Stable rating of Encorp Systembilt Sdn Bhd’s (Encorp or the Company) RM1.575 bil Sukuk Murabahah. The reaffirmation reflects our expectation that the Sukuk’s robust debt coverage will be sustained by a steady inflow of monthly concession payments, backed by its tight transaction structure.
Encorp is the concessionaire for the development of 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept. These quarters were completed in December 2003 and handed over to the Government of Malaysia (GoM) in early 2004, thus fulfilling the Company’s obligations under a Privatisation Agreement (PA) dated 9 February 1998. In return, Encorp is entitled to monthly concession payments from the GoM via the Ministry of Education. These are not subject to performance-related deductions as the Company is not required to maintain the facilities.
Despite facing minimal counterparty risk as the GoM is the ultimate paymaster, Encorp’s debt-servicing ability remains susceptible to payment delays as it relies solely on these receipts to service the Sukuk. The Company recorded a finance service coverage ratio (FSCR, with cash balances, calculated over a 12-month period, on payment month) of 1.42 times in the most recent principal repayment month of November 2020 - lower than RAM’s projected 1.59 times. The shortfall was due to longer hold-ups in the receipt of concession payments, pending Encorp’s application for a certificate of registration with the Ministry of Finance - which was eventually resolved on 23 November 2020. Including the five concession payments received on 3 December 2020, the Company’s FSCR would have been lifted to 1.84 times. Payments from the GoM have since regularised, with the one for March 2021 already received.
Going forward, RAM expects Encorp to register respective minimum and average FSCRs of 1.54 and 1.62 times throughout the Sukuk’s tenure (the Company’s base case: 1.62 and 1.90 times). These commensurate with the 1.50 times required for an AA1 rating. Our stressed assumption includes a three-month delay in the receipt of concession payments and low investment income (1% of Encorp’s opening cash balances).
We also envisage an increase in the Company’s administrative costs. Although our projections indicate Encorp has room to shoulder some additional expenses while maintaining the Sukuk’s rating, this will be subject to the Sukuk Trustee’s approval. We derive comfort from the transaction’s strict covenants that limit the possibility of cashflow leakages, including the prohibition of dividend distributions while the Sukuk remains outstanding along with limitations on Encorp’s activities and added expenses.
As the last tranche of the Sukuk will mature three months after the expiry of the concession in February 2028, the short intervening period does not provide any buffer against potential refinancing or restructuring, should the need arise. Nonetheless, the concession payments from the GoM are anticipated to sufficiently meet the Sukuk’s repayment. Based on our stressed projections, Encorp’s cash balances after its final principal repayment should provide a buffer of approximately seven months’ contractual payments from the GoM.
While termination risk is deemed remote, Encorp will still be entitled to concession payments from the GoM through the rest of the concession term even if the PA were to be terminated due to the Company’s default.
Seri Nuralya Munawir
(603) 3385 2484
(603) 3385 2577
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Ratings on Encorp Systembilt Sdn Bhd