RAM Ratings revises Edaran SWM’s outlook to positive, reaffirms AA3 rating

Published on 26 January 2015

RAM Ratings has revised the outlook on the AA3 rating of Edaran SWM Sdn Bhd’s (Edaran or the Company) initial RM750 million issuance under its RM1 billion IMTN Programme (2012/2032) (the Sukuk), from stable to positive. Concurrently, the rating has been reaffirmed. The outlook revision is anchored by Edaran’s better-than-expected financial results in the last 2 years. Should this cost-saving trend continue over the next 2 years, the rating of the Sukuk may be upgraded a notch or more. Edaran’s rating considers its strong business and financial position, low counterparty risk and the exposure of SWM Environment Sdn Bhd (SWME) and Edaran to tariff-revision risk. Edaran is the main sub-contractor for its sister company, SWME, which has been awarded a 22-year concession by the Government to exclusively provide solid-waste collection services and public cleansing services in the states of Johor, Negeri Sembilan and Melaka.

Edaran’s debt servicing indicators are expected to improve significantly. “Following some RM120 million of operational cost savings in fiscal 2013 and the first 8 months of 2014 amid lower-than-anticipated wage expenses, the Company’s minimum annual finance service coverage ratio (FSCR) is projected to come up to 3.46 times (compared to 2.70 times earlier),” notes Davinder Kaur Gill, RAM’s Co-Head of Infrastructure and Utilities Ratings. “Thanks to stringent distribution tests that limit payments to Edaran’s shareholders, all costs savings to date have boosted the Company’s cash coffers and, in turn, lifted its annual FSCR profile,” she adds.

In return for carrying out the services required by SWME, Edaran receives fixed fees (a proportion of SWME’s fees under the Concession Agreement (CA)) - provided it meets the straightforward operational requirements stated in the CA. Besides, counterparty risk is deemed low given that the ultimate and sole paymaster is the Solid Waste and Public Cleansing Management Corporation (the Corporation, a privatised body under the Ministry of Housing and Local Government), which receives its funding from the Government. Despite some hiccups in the past, payments from the Corporation have been prompt and remain in adherence with the CA terms.

Any revision of SWME’s fees will cause a corresponding change in Edaran’s fees. Notably, the Government has exclusive and absolute discretion to decide on a review of the agreed fees, even though the CA specifies the mechanism and a host of considerations for such review. In this respect, our analysis assumes that the fees remain constant throughout the tenure of the Sukuk. Similar to other concession-based businesses, regulatory and force majeure risks are inherent.

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Adeline Poh
(603) 7628 1021
adeline@ram.com.my