RAM Ratings has reaffirmed the AA1/Stable rating of Sasaran Etika Sdn Bhd’s (SESB or the Company) RM220 million Fixed Rate Serial Bonds

Published on 07 May 2014

RAM Ratings has reaffirmed the AA1/Stable rating of Sasaran Etika Sdn Bhd’s (SESB or the Company) RM220 million Fixed Rate Serial Bonds (2012/2027) (the Bonds).
SESB holds a 22½-year concession for the design, construction, completion and maintenance of residential colleges to accommodate 5,000 students of the International Islamic University of Malaysia (IIUM) in Pahang (the Project). The concession is constituted in a Concession Agreement (CA) between the Government of Malaysia (GoM) via the Ministry of Higher Education, IIUM and SESB. The proceeds of the Bonds are mainly intended to fund the construction of the Project. In return for construction works, SESB will be entitled to receive Availability Charges, payable by the GoM through IIUM, which will be the sole source of repayment of the Bonds.
A Performance Guarantee (PG) of up to RM220 million from United Overseas Bank (Malaysia) Berhad (UOB) (rated AAA/Stable/P1 by RAM) provides substantial comfort to bondholders during the construction period. Under the PG, UOB irrevocably and unconditionally undertakes to pay the guaranteed amount should SESB fail to complete construction within the contracted 30 months. We note that actual construction progress as at 31 March 2014 was 93%, ahead of the 89% estimated in the projected work programme.
A highly predictable stream of Availability Charges, payable to SESB under the CA post-completion of the Project, further supports the rating. Accordingly, the Company’s debt-servicing ability is expected to be strong, its projected stressed minimum Debt Service Cover Ratio (DSCR) standing at 1.50 times after optimising dividends to shareholders to the extent allowed under the terms of the transaction. As the GoM is the ultimate payment obligor, SESB faces minimal counterparty risk. Cashflow leakage is minimised by the tight structure and restrictive covenants of the transaction.
Nevertheless, the rating is moderated by the risk of delays in payment due to administrative or procedural issues. As the Project is a greenfield venture, there is no track record of payment from the GoM. Further, the transaction is exposed to termination risk. During the construction period, termination of the CA is possible in the event of default by SESB. However, bondholders will have recourse to the PG should this occur. Post-completion of the Project, termination due to non-performance on the part of the Company is viewed as less likely, given the non-complex nature of maintenance services. To this end, SESB recently identified Henry Butcher Malaysia Sdn Bhd as the maintenance service provider for the Project. Termination of the CA due to non-payment of Availability Charges by IIUM is deemed highly unlikely as funds for payment of these charges ultimately stem from the GoM.

Media contact
Kathleen Por
(603) 7628 1015
kathleen@ram.com.my