RAM Ratings reaffirms AA2 rating of Encorp Systembilt’s sukuk

Published on 30 May 2013

RAM Ratings has reaffirmed the long-term rating of Encorp Systembilt Sdn Bhd’s (“ESSB” or “the Company”) RM1.575 billion Sukuk Murabahah (2012/2028) (“the Sukuk”) at AA2, with a stable outlook.

ESSB is the concessionaire for the development of 10,000 units of teachers’ quarters throughout Malaysia, based on the “build, transfer and finance” concept. These quarters were completed in December 2003 and handed over to the Government of Malaysia (“GoM”) in early 2004 – fulfilling its obligations under the Privatisation Agreement (“PA”).

The rating reflects highly predictable and contractually-backed concession payments from a strong counterparty, i.e. the GoM (via the Ministry of Education). The GoM has demonstrated a track record of regular payments to ESSB since November 2006. Backed by the stream of monthly payments, we envisage the Company registering a stressed minimum finance service cover ratio of 1.37 times throughout the Sukuk’s tenure. In addition, ESSB is not exposed to performance or operating risks, given that it has fulfilled its obligations under the PA and is not required to operate the quarters.

Further, ESSB’s debt-servicing ability is safeguarded by the transaction’s tight structure and covenants, which minimise cashflow leakage. These include limits on the Company’s activities and incurrence of additional debt. ESSB is not permitted to declare or make any dividend payments during the Sukuk’s tenure, except for a one-off RM92.5 million dividend payment to its ultimate holding company, Encorp Berhad, in FY Dec 2012. ESSB has also opened and maintained an Escrow Account (as per the requirements of the financing terms) that captures monthly concession payments from the GoM. The account is operated solely by the Security Trustee and pledged to the Sukuk holders as security.

Nevertheless, ESSB’s debt-servicing ability remains vulnerable to the possibility of material delays in the disbursement of concession payments, as it relies solely on the monthly concession payments to service the Sukuk. While monthly payments generally come in within 1-2 months of the invoice dates, there have been previous delays due to administrative issues. As such the possibility of future delays cannot be entirely discounted.

The last tranche of the Sukuk matures on 18 May 2028, i.e. after the expiry of the concession period (on 9 February 2028). While the accumulated balances in the Escrow Account are sufficient to cover the repayment of the Sukuk, we envisage little cash buffer towards the tail end of the Sukuk’s tenure. Under our stressed scenario, the Company’s cash balances are estimated to come up to about RM66.0 million (as at May 2028).

Media contact

Robert Ching

(603) 7628 1031

robertching@ram.com.my