Published on 17 Aug 2021.
RAM Ratings has reaffirmed the AA3/Stable rating of the RM165 mil Islamic Medium-Term Notes (the Sukuk) (2018/2033) under Dynasty Harmony Sdn Bhd’s (Dynasty Harmony) RM300 mil Sukuk Programme (2018/2036).
A wholly-owned funding vehicle of GFM Services Berhad, Dynasty Harmony relies solely on the residual cashflow of sister company, KP Mukah Development Sdn Bhd - the concession-holder for the development and maintenance of the Universiti Teknologi MARA (UiTM) campus in Mukah, Sarawak (the Project) – after the latter meets its own operational and financial obligations. As such, KP Mukah and Dynasty Harmony are closely aligned from a credit perspective.
The reaffirmed rating is premised on the transaction’s stable cashflow, adequate liquidity and solid projected finance service coverage in line with the required rating thresholds. KP Mukah continued to receive fixed and prompt monthly Availability Charges (ACs) from the Government of Malaysia (through UiTM) amid the COVID-19 pandemic and movement restrictions. This has been key to supporting its repayment obligations. Its maintenance key performance indicator (KPI) averaged 97% in 2020 (concession requirement: 93%) while deductions trended down, with none recorded in 4M 2021 (2020: 4.35%; 2019: 10.95%).
KP Mukah’s finance service coverage ratio (FSCR, with cash balances and calculated in payment months) of 2.00 times as at end-2020 exceeded our expectation of 1.72 times, while Dynasty Harmony’s subordinated FSCR (sub-FSCR, with cash balances and calculated in payment months) was 1.70 times (projected: 1.50 times). The outperformance was largely supported by timely AC receipts, against RAM’s sensitised assumption of a three-month payment delay. We expect KP Mukah and Dynasty Harmony to continue to meet their respective FSCR and sub-FSCR requirements, in line with the current rating, over the remaining tenure of the Sukuk.
The rating is anchored by a tight transaction structure and restrictive covenants to minimise cashflow leakage. As Dynasty Harmony’s Sukuk is subordinated to KP Mukah’s financial obligations, the rating has been notched down from KP Mukah’s implied credit strength (its loan obligations are not rated by RAM). Dynasty Harmony’s sukukholders will receive only profit payments in the first 10 years of the Sukuk. Principal repayments will commence after KP Mukah fully repays its existing loan obligations.
Profit expense volatility, stemming from KP Mukah’s floating rate liabilities, moderates the rating. While the CA may be terminated if deductions exceed 25% of monthly asset management service charges for three consecutive months, the low to moderate complexity of the maintenance work makes this unlikely. Should termination occur, compensation from the government will only address outstanding liabilities at KP Mukah and therefore will not sufficiently cover sukuk repayments.
Davinder Kaur Gill
(603) 3385 2525
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