RAM Ratings has reaffirmed the AA2/Positive rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah.

Published on 20 July 2016

RAM Ratings has reaffirmed the AA2/Positive rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah. This reflects our expectation that ESSB’s debt-servicing aptitude would continue to improve on the back of cash accumulation via consistent concession payments from the Government of Malaysia (GoM) and a sturdy investment income performance.

ESSB enjoys a highly predictable income stream. Contractually backed monthly payments from the GoM (via the Ministry of Education (MoE)) are not conditional upon performance and have stayed regular. Operating expenses should also remain minimal as ESSB is not required to undertake maintenance work on the teachers’ quarters that it had built. Barring unforeseen payment delays or a material decline in investment yields, there is a very high likelihood of ESSB attaining a stressed minimum FSCR of 1.50 times by next year, commensurate with an AA1 rating. Cashflow leakages are minimised by tight covenants and structural features, such as the prohibition from declaring dividends and limitation on incurrence of additional debt.

Although counterparty risk is low, ESSB’s sole reliance on payments from the GoM to meet its obligations on the Sukuk renders its debt-servicing ability sensitive to delays in payments. A cumulative holdup of beyond 3 months’ payments could cause the Company’s stressed minimum FSCR to fall short of our expectation. Nevertheless, ESSB has not faced extended delays in payments since final accounts on additional work claims were wrapped up 9 years ago. In May this year, the processing of payments for ESSB had been placed under the purview of a different division of the MoE. While payments for at least 1 month were slightly affected by the administrative shift, such payment interruption is expected to be only temporary given this transition.

The last tranche of the Sukuk matures 3 months after the expiry of the concession (in February 2028). Stretching the repayment period beyond the tenure of the concession may constrain ESSB’s ability to refinance/restructure the transaction, should the need arise. However, the likelihood of this is low, as payments from the GoM are adequate for the repayment of the Sukuk. Based on our stressed scenario, ESSB’s cash balance after its final principal payment is equivalent to a buffer of more than 6 months of contractual payments from the GoM.

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 GoM in early 2004, in fulfilment of the Company’s obligations under a Privatisation Agreement dated 9 February 1998.

Media contact
Peter Kong, CFA
(603) 7628 1029
peterkong@ram.com.my