Published on 24 Aug 2022.
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). The reaffirmed rating is premised on the transaction’s stable cashflow, adequate liquidity and solid projected finance service coverage, commensurate with the current rating.
Dynasty Harmony is a wholly owned funding vehicle of GFM Services Berhad (GFM). To service its dues under the Sukuk, Dynasty Harmony relies solely on the residual cashflow of sister company, KP Mukah Development Sdn Bhd (KP Mukah), after the latter meets its own operational and financial obligations. KP Mukah is the concession holder for the development and maintenance of the Universiti Teknologi MARA (UiTM) campus in Mukah, Sarawak. Given its subordinated status from a cashflow and security perspective, the Sukuk is rated two notches down from the implied credit strength of KP Mukah’s loan liabilities.
During the review period, KP Mukah received timely availability charges (ACs) and maintenance service charges (MSCs) from the Government of Malaysia, through UiTM. Its maintenance performance was commendable with an average key performance indicator score of around 98%, while deductions stood at less than 1% of annual MSCs. Maintenance has markedly improved since the appointment of new personnel and initiatives undertaken by GFM.
KP Mukah’s finance service coverage ratio (FSCR) and Dynasty Harmony’s subordinated FSCR (sub-FSCR) – both with cash balances, calculated in payment months – exceeded RAM’s projections in 2021. The outperformance was attributable to timely receipts of ACs and a better maintenance performance relative to RAM’s assumptions of a three-month payment delay and monthly deductions of 15%. Based on our sensitivity analysis, the respective ratios should stay in line with the current rating thresholds of above 1.50 times and 1.20 times over the remaining tenure of the Sukuk. The Sukuk’s credit strength is further safeguarded by the transaction’s covenants that limit indebtedness and distributions.
Profit expense volatility, stemming from KP Mukah’s floating-rate liabilities, moderates the rating. The rising interest rate environment will increase its profit payment obligations, reducing KP Mukah’s residual cashflow. That said, the FSCR and sub-FSCR should remain commensurate with the Sukuk’s rating even under stressed profit rate assumptions. While the concession agreement 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 address only outstanding liabilities at KP Mukah and therefore will not sufficiently cover sukuk repayments.
Liew Kar Ling
(603) 3385 2586
Davinder Kaur Gill
(603) 3385 2525
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 2022 by RAM Rating Services Berhad
Ratings on Dynasty Harmony Sdn Bhd