RAM Ratings has upgraded the long-term rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah to AA1 from AA2.

Published on 05 May 2017.

RAM Ratings has upgraded the long-term rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah to AA1 from AA2. At the same time, the outlook on the rating has been revised to stable from positive. The rating upgrade is premised on ESSB’s achievement of a minimum finance service coverage ratio (FSCR) of 1.50 times under our stressed scenario, which commensurates with an AA1 rating. The Company’s improved debt-servicing ability is supported by cash accumulation via consistent concession payments from the Government of Malaysia (GoM), steady investment income and lower expenses.

ESSB enjoys highly predictable, contractually backed monthly payments from the GoM (via the Ministry of Education (MoE)). These payments are not conditional upon performance as ESSB is not required to carry out any maintenance work on the teachers’ quarters that it built. As such, operating expenses are expected to remain minimal. Notably, cashflow leakages are minimised by tight covenants and structural features, such as the Company’s prohibition from declaring dividends and a limitation on the incurrence of additional debt.

Despite a low degree of counterparty risk, ESSB is still susceptible to delays in the receipt of payments. Given that these payments are its sole source of funds to meet its obligations under the Sukuk, any material delay in their receipt will ultimately affect the Company’s debt-servicing ability. For instance, an administrative shift within the MoE for the processing of payments to ESSB in May 2016 had resulted in a slight delay in disbursement. However, there was no impact on the Company’s debt-servicing ability and timing of payments has since regularised.

Meanwhile, the last tranche of the Sukuk matures 3 months after the expiry of the concession in February 2028. The short intervening period does not provide the Company a sufficient buffer for potential refinancing/restructuring of the transaction, should the need arise. However, the likelihood of this is low, as payments from the GoM would adequately cover the repayment of the Sukuk. Based on our stressed scenario, ESSB’s cash balances after its final principal payment would be equivalent to a buffer of more than 6 months’ 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.

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

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my