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RAM Ratings reaffirms AA1 rating of Indera Persada’s bonds
Published on 30 Aug 2022.
RAM Ratings has reaffirmed the AA1/Stable rating of Indera Persada Sdn Bhd’s (the Company) RM280 mil Fixed Rate Serial Bonds (2013/2028) (the Bonds).
The reaffirmation reflects our expectation that Indera Persada’s solid debt servicing ability will remain supported by timely inflows of monthly concession-based Availability Charges (ACs) and structural covenants of the transaction. ACs are the sole source of repayment for the Bonds and are paid following the completion of the Public Works Department (PWD) training center (the Project) in Melaka.
Owing to prompt concession payments, the Company’s debt service coverage ratios (DSCRs) surpassed RAM’s projections and the minimum 1.50 times required to maintain the Bonds AA1 rating. Counterparty risk is deemed low as the ultimate obligor of monthly concession payments is the government, via the PWD.
Throughout the Bonds’ tenure, Indera Persada’s projected DSCRs are expected to broadly meet the 1.50 times minimum required to support the rating of the Bonds and the transaction’s financial covenants, except for a temporary breach to 1.46 times in September 2023 under our stressed assumptions. RAM’s sensitised cashflow analysis assumes a three-month payment delay of ACs and maintenance expenses in line with concession receipts.
While failure to meet the Bonds’ financial covenants, if not remedied, would constitute an event of default, there is a likelihood for the Company to outperform RAM’s assumptions, thus avoiding any breach. The weaker projected DSCR follows lower cash retention after higher than expected dividend and subordinated bond coupon payments during the review period. Any payout to shareholders and/or subordinated lenders is subject to a DSCR distribution covenant of at least 1.50 times.
In assessing future dividend and/or subordinated bond payments, we expect management to have the financial discipline to ensure continuous adherence to the minimum required DSCRs throughout the transaction’s tenure (and not just at the point of payment). Excessive distributions (though without breaching covenants) in early years could compromise Indera Persada’s future debt service coverage and cause immediate rating pressure.
In FY Sep 2021, Indera Persada recorded a pre-tax loss of RM5.99 mil owing to a lumpy RM13.05 mil construction cost incurred from the finalisation of Project accounts (with no further cost anticipated). As observed in prior years, the Company depends on advances from Digistar to support excess expenses beyond concession receipts. We do not view favourably any reliance on shareholder backing to cover expenses. Despite Digistar’s strong willingness to extend support, its future capacity to do so may be constrained by its financial performance. Inadequate cashflows could impact Indera Persada’s maintenance performance, though the risk of non-performance is remote with monthly deductions at below 1% in May 2022 (2021: 8% on average).
Any near-term risk to the transaction’s credit profile is mitigated by the Bonds’ structural features and Indera Persada’s adherence to transaction covenants to date. The bondholders’ interests remain protected by (i) the transaction’s DSCRs computation formula which considers only AC-related inflows and outflows; and (ii) utilisation limits on the respective designated accounts which segregate ACs and maintenance inflows and outflows.
While termination risk is remote considering the non-complex nature of maintenance, Indera Persada and the bondholders are entitled to compensation receipts, should it occur. Like most concession-related companies, Indera Persada is exposed to single-project risk and maintains insurance coverage, as a force majeure or major operational failure may disrupt its entire operations.
Analytical contacts
Zachary Tan
(603) 3385 2612
zachary@ram.com.my
Davinder Kaur Gill
(603) 3385 2525
davinder@ram.com.my
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
