RAM Ratings reaffirms the rating of Sasaran Etika’s RM220 million Fixed Rate Serial Bonds

Published on 23 April 2013

RAM Ratings has reaffirmed the long-term rating of Sasaran Etika Sdn Bhd’s (“SESB” or “the Company”) RM220 million Fixed Rate Serial Bonds (2012/2027) (“the Bonds”) at AA1, with a stable outlook.

SESB holds a 22½-year concession for the design, construction, completion and maintenance of residential colleges for 5,000 students of the International Islamic University Malaysia in Pahang (“the Project”). This is constituted in the Concession Agreement (“CA”) between the Government of Malaysia (“GoM”) (represented by the Ministry of Higher Education (“MOHE”)), the university (“IIUM”) and SESB. The proceeds of the Bonds will largely be used to fund the construction of the Project. Funds for repayments on the Bonds will solely emanate from Availability Charges, payable by the GoM through IIUM, in return for the construction works.

We note that construction was 33% complete as at 18 March 2013, ahead of the scheduled 20% in the projected work programme. Substantial comfort is also derived from a Performance Guarantee (“PG”) of up to RM220 million extended by United Overseas Bank (Malaysia) Berhad (“UOB”) (rated AAA/Stable/P1 by RAM) to bondholders during the construction period. Under the PG, UOB irrevocably and unconditionally undertakes to pay the guaranteed amount should an Event of Default under the Trust Deed occur, specifically the failure to complete construction within the contracted 30 months.

The rating is further supported by the highly predictable stream of Availability Charges, payable to SESB under the CA post completion of the Project. Backed by this predictable cashflow, the Company’s debt-servicing ability is expected to be strong, with a projected stressed minimum Debt Service Cover Ratio (“DSCR”) of 2.1 times. SESB faces minimal counterparty risk as the GoM is the ultimate payment obligor (via MOHE). Cashflow leakage is also mitigated by the tight transaction structure and restrictive covenants.

Nevertheless, the rating is moderated by the risk of delays in payment due to administrative or procedural issues. As this is a greenfield project, there is also no track record of payment from the GoM. While the transaction is exposed to termination risk, bondholders will have recourse to the PG should the CA be terminated due to default by SESB during the construction period. Non-performance by the Company post completion, however, is viewed as less likely, given the non-complex nature of the maintenance job. The likelihood of termination as a result of non-payment by IIUM is also deemed low, as funds for the Availability Charges ultimately stem from the Government.

Media contact

Karin Koh

(603) 7628 1174

karin@ram.com.my