Published on 31 Oct 2022.
RAM Ratings has assigned a preliminary AA3/Stable rating to the Senior Sukuk to be issued under Qiradh Capital Sdn Bhd’s (Qiradh or the Issuer) 10-year RM200 mil Sukuk Wakalah Programme (the Programme). The transaction is a securitisation of factoring receivables purchased from Zikay Factoring Sdn Bhd (Zikay, the Originator) which will also be Servicer of the transaction. Since 2006, Zikay has actively provided Islamic factoring facilities to local small and medium enterprises (SMEs) that provide shariah-compliant services or goods to the federal and state governments, government agencies, government- or state government-linked companies (GLCs or SGLC).
For the first issuance, the Issuer expects to issue RM[15.0] mil of Senior Sukuk and RM[5.7] mil of Junior Sukuk (collectively, the First Series). The Senior Sukuk will always rank ahead of Junior Sukuk. Proceeds from sukuk will be used to fund the purchase of an indicative RM[17.6] mil of eligible receivables from Zikay, prefund required liquidity reserves and to meet initial programme expenses. The First Series will mature in the 60th month from the issuance date. Zikay will in turn use the proceeds to refinance existing borrowings and as working capital for its factoring business.
The Programme allows for issuance of sukuk without a concurrent purchase of receivables from Zikay (Advance Senior Sukuk), subject to parking the proceeds in Qiradh’s account until sufficient eligible receivables can be sold to the Issuer within a predefined period. Any issuance of Advance Senior Sukuk will be subject to a separate cash reserve to cover any additional profit and transaction obligations to be funded via issuance of Junior Sukuk. If Zikay is unable to sell sufficient receivables to Qiradh within the predefined period, the Issuer will need to prepay the unutilised proceeds of Advance Senior Sukuk to the sukukholders with a prepayment premium.
Under the transaction structure, the Senior Sukuk will benefit from a minimum required overcollateralisation of [15.38]% which provides adequate credit support that commensurate with its preliminary AA3 rating.
The transaction has a four-year Revolving Period (from first issuance) that allows Qiradh to replenish the pool by using cash collections from factoring receivables purchased to buy new receivables from Zikay. Predefined eligibility criteria such as minimum factoring profit rate and limits on single obligor and obligor exposures to GLCs and SGLCs would reduce deviations in the profile of receivables arising from new purchases during the Revolving Period. To address Zikay’s origination and servicing risks, the transaction incorporates a trigger mechanism that will cease further new purchases and divert collections for payment of Senior Sukuk profit and principal until it is fully redeemed.
The factoring receivables backing the sukuk carry low default risk, given that the ultimate obligors for invoices financed by Zikay are largely the federal and state governments, which have seen near-zero defaults in the past, even during the Covid-19 pandemic. Our review of the historical data shows average collection periods range between two to three months. The Ministry of Finance’s (MOF) e-Perolehan (eP) system that processes federal procurement contracts enables Zikay to better verify and track contract details and invoice payments. The Perolehan Kerajaan (PK 6) procedural guide on the government project tendering and factoring process endorses the factoring house’s contractual rights and acknowledges notices of assignment from suppliers to the approved factoring house.
In addressing commingling risk to the transaction, Zikay will give the Security Trustee a power of attorney to control the transfer of funds from the Originator’s Collection Account registered under the MOF’s eP system – to which the obligors remit payments – to the Issuer’s accounts, should there be any material adverse change in Zikay’s financial conditions or operations, or if a servicer event of default occurs. Zikay will also create a first-ranking legal charge over the Collection Account in favour of the sukukholders.
As the rating is preliminary, any material changes in the underlying assumptions may result in a change in the rating. Final rating will be assigned after RAM’s satisfactory review of the final transaction documents and relevant legal and tax opinions.
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Ratings on Qiradh Capital Sdn Bhd