Published on 25 Feb 2022.
RAM Ratings has revised the outlook on Konsortium ProHAWK Sdn Bhd’s (ProHAWK or the Company) RM900 mil Islamic Medium-Term Notes Programme (2013/2033) (the IMTN) from stable to negative, and reaffirmed its AA2 rating.
ProHAWK holds the concession to design, construct, commission and maintain Hospital Tunku Azizah (HTA), formerly known as the Women and Children Hospital Kuala Lumpur. The negative outlook reflects potential temporary liquidity shortfalls which may affect the Company’s ability to meet required minimum Finance Service Reserve Account (FSRA) balances and maintain a Finance Service Coverage Ratio (FSCR) of at least 1.50 times under our stressed cashflow projections.
Since the start of Asset Management Services (AMS), ProHAWK had incurred additional operational expenses of approximately RM6 mil annually owing to the widening scope of ICT operations and maintenance services (OMS) than originally provided for under the concession. Compensation for the additional scope of work has yet to be received as Government approval of the sum is still pending. Owing to lower than expected cashflow generation, there will be a temporary breach of the transaction’s minimum required FSRA balances and FSCR levels to sustain the AA2 rating should there be delay in additional concession payments by the Government.
In the interim, we expect UEM Group Berhad, as the Company’s major shareholder, to continue to provide liquidity support to bridge the revenue shortfalls, as and when needed. UEM’s support underpins the affirmation of the issue rating. A standby letter of credit (SBLC) of RM25 mil procured by UEM currently addresses a shortfall in the minimum FSRA balance. As the SBLC expires at end-March 2022, we have not factored it into our rating assessment. As of 3 February 2022, ProHAWK has received all payments outstanding with regards to Availability Charges and AMS Charges for the months of August to December 2021. Lower compensation of ICT OMS revenue and/or further delays beyond the one-year assumed in RAM’s assessment will prolong the recovery in its cash flows and covenant breaches.
While UEM has not extended explicit support for the IMTN programme, we derive comfort from the strong alignment of interest between ProHAWK and UEM, given the latter’s role as the infrastructure arm of Khazanah Nasional Berhad. To date, UEM has provided financial support to the Company during the construction stage (via a letter of undertaking) to ensure the completion of the hospital, as well as SBLCs to address previous FSRA shortfalls. The necessity for shareholder support to maintain covenanted transaction performance should diminish once payments for ICT OMS commence.
Throughout the concession period, ProHAWK is entitled to concession payments from the Government of Malaysia – a strong counterparty – via the Ministry of Health (MoH). The timeliness of these monthly disbursements is crucial as the Company depends solely on them to meet its obligations under the IMTN. Recent payments had been slightly delayed due to administrative hurdles. The average collection period of 2.9 months in FY Dec 2021 (FY Dec 2020: 2.3 months) is still shorter than our three-month sensitivity.
Performance-related deductions from AMS payments have crept up of late, averaging 8.1% in 11M FY Dec 2021. Deductions resulted from disruption in the supply of exhaust fan parts and a shortage of clean linen amid an influx of patients. The Company hopes to expedite minor remedial works delayed during the pandemic as well as refining deduction rate parameters with the MoH to better align expectations. Going forward, ProHAWK seeks to reduce deductions to around 4%. In this regard, we are reassured by the long hospital maintenance track record of the sub-contractor, Edgenta Healthcare Management Sdn Bhd, and the Company’s back-to-back deductions arrangement with the former.
The transaction’s financing structure and restrictive covenants shield ProHAWK from potential cashflow leakages. These include limitations on distributions to shareholders and repayments of subordinated shareholder advances. The Company can only make distributions if the FSCR stays at a minimum 1.50 times after such distributions.
The Company is susceptible to the risk of termination of the concession agreement. The likelihood of termination due to default by the Government is deemed remote but a default on the part of the Company is possible. If this occurs during the AMS period, the IMTN holders will be protected as the Government will have to pay the financing amount secured to build HTA.
(603) 3385 2517
Thong Mun Wai
(603) 3385 2522
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Published by RAM Rating Services Berhad
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Ratings on Konsortium ProHAWK Sdn Bhd