RAM Ratings revises Encorp Systembilt's sukuk rating outlook to positive

Published on 29 May 2015

The revision of the outlook on Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah (2012/2028) (the Sukuk) to positive from stable reflects RAM Ratings’ expectation that the Company’s projected stressed minimum FSCR will improve further within the next 2 years, driven by the continuous accumulation of a cash buffer and the expectation that payments from the Government of Malaysia (GoM) to ESSB will remain regular. Concurrently, we have reaffirmed the AA2 rating of the Sukuk.
The rating is supported by ESSB’s robust debt-servicing ability, underscored by contractually-backed concession payments from the GoM (via the Ministry of Education), which have regularised since final accounts on ESSB’s additional work claims were completed 8 years ago. In addition, the Company boasts a highly predictable cashflow coverage, underpinned by its minimal operating expenditure requirement and the absence of performance risks. ESSB is expected to register a stressed minimum FSCR of at least 1.41 times throughout the tenure of the Sukuk.
The integrity of the transaction is safeguarded by structural features and covenants which minimise cashflow leakage. These include limits on the Company’s activities and incurrence of additional debt as well as restrictions on the declaration of dividends during the tenure of the Sukuk. Additionally, ESSB maintains an Escrow Account (as per requirements of the transaction’s financing terms) that captures the monthly concession payments. The account is operated solely by the Security Trustee and is 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 these payments to service the Sukuk. While these payments generally come in within 1-2 months of the invoice dates, there have previously been 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 – after the expiry of the concession (on 9 February 2028). Stretching the repayment period beyond the concession period leaves ESSB with no buffer for potential refinancing/restructuring, should the need arise. However, we consider the likelihood of this occurring to be low, as payments from the GoM are contractual and sufficient for the repayment of the Sukuk. Under our stressed scenario, ESSB’s cash balance is estimated to come up to about RM70 million after the repayment of its final principal payment.
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, in fulfilment of the Company’s obligations under a Privatisation Agreement (PA) with the former, dated 9 February 1998.

Media contact
Jason Tan
(603) 7628 1030
jasontan@ram.com.my