RAM Ratings reaffirms ratings of Selia Selenggara Selatan

Published on 22 December 2011
RAM Ratings has reaffirmed the respective AAA(bg), C1, and C3 ratings of Selia Selenggara Selatan Sdn Bhd’s (“Selia Selatan” or “the Company”) RM170 million Senior Secured Serial Bonds (“Senior Bonds”), RM22 million Junior Secured Serial Notes B (“Junior Notes B”), and RM124 million Junior Secured Serial Notes C (“Junior Notes C”); all the long-term ratings have a stable outlook. The enhanced rating of the Senior Bonds reflects the credit strength of the unconditional and irrevocable bank guarantee (“BG facility”) extended by Malayan Banking Berhad, which carries respective long- and short-term financial institution credit ratings of AAA and P1 from RAM Ratings (reaffirmed in December 2011).

A special-purpose vehicle, Selia Selatan’s business profile is anchored by its exclusive right to maintain federal roads in Negri Sembilan, Melaka and Johor, by way of a 15-year Privatisation Agreement (“PA”) with the Government of Malaysia (“GoM”). We note that its PA was recently extended for 10 years effective 16 February 2016 – conditional upon the signing of a new supplemental agreement. In addition, the Company also enjoys fairly steady margins throughout the concession period via its sub-contract agreements. Its counterparty risk is deemed low as the GoM is its sole obligor under the PA. Backed by its business profile, Selia Selatan’s debt-servicing ability has been consistently healthy.

The Company is envisaged to continue displaying a healthy debt-servicing ability on the Senior Bonds throughout their tenure. Despite the anticipated tighter pre-financing cashflow in FY June 2012, it is still envisaged to meet the requirements of its debt service reserve account (which is essentially more stringent post implementation of the BG facility). Selia Selatan also has the flexibility to defer the payment of sub-contracting costs to the related companies if required, as evidenced in the last 5 years.

As stated in the PA, Selia Selatan’s work rates had been scheduled for revision on 16 February 2011; approval for this is expected to be obtained by end-December 2011. Based on RAM Ratings’ interaction with the management, work rates are expected to be increased by 20%-25% effective January 2012. Even without these increases, its minimum and average debt-service coverage ratios (“DSCRs”) (with cash balances, post-distribution) on the Senior Bonds are envisaged to stay strong at 2.81 and 2.91 times, respectively.

As noted before, the Company’s remaining cash reserves after meeting its obligations on the Senior Bonds are not expected to be able to fully cover the repayment of the Junior Notes in their final year, i.e. 2014. Although its reserves would meet its payment obligations on the Junior Notes B, Selia Selatan’s ability to service this tranche cannot be examined in isolation from its obligations on the Junior Notes C, as both rank pari passu. However, the Company’s obligations on the Junior Notes B will be paid first as they rank ahead of the Junior Notes C under the cashflow waterfall. This enables the Junior Notes B to be accorded a 2-notch rating advantage over the Junior Notes C.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my