Published on 27 Oct 2017.
RAM Ratings has reaffirmed the AA2/Stable rating of Konsortium ProHAWK Sdn Bhd’s (ProHAWK or the Company) RM900 million Islamic MTN (IMTN) Programme (2013/2033).
Despite multiple delays in the completion of the 600-bed Women and Children Hospital (WACH or the Project), ProHAWK is expected to register a stressed minimum finance service coverage ratio (FSCR) of 1.50 times throughout the tenure of the IMTN, which is commensurate with an AA2 rating. Completion of the WACH has been pushed back multiple times from the contractual deadline in October 2016. This has been due to prolonged testing and commissioning of equipment, as well as requests for interior design and layout changes amid operational and functional requirements. The Project is expected to be handed over to the Government of Malaysia (GoM) in February 2018.
The reaffirmation of the rating is also premised on expectations that the Company will defer distributions to shareholders to conserve cash, along with ready support from UEM Group Berhad (UEM or the Group) via a shareholder’s undertaking. Under the supplemental Deed of Undertaking and Subordination, the shareholders’ undertaking has been extended to 31 December 2018, to meet any shortfall in the designated accounts and payments related to the IMTN. As at end-June 2017, the hospital was 99.8% completed.
The transaction is exposed to the risk of termination of ProHAWK’s Concession Agreement (CA) with the GoM. Termination can be triggered by non-performance on the part of either party to the CA. While the probability of termination due to default by the GoM is deemed remote, default by the Company is possible, especially during the construction stage. Although ProHAWK has exceeded the 36-month construction period under the CA, the agreement is unlikely to be terminated at this juncture, given that construction is already at its tail end. The Company has applied for an extension of time from the GoM.
ProHAWK had, on 19 October 2017, obtained an extension from the IMTN holders with regard to the financing terms, under which, a technical default will occur if completion of the Project stretches beyond October 2017. The extension has been approved for up to 31 March 2018.
After the completion of the Project, ProHAWK’s strong debt-servicing ability will be backed by a predictable stream of contractual cashflow from a strong counterparty, i.e. the GoM through the Ministry of Health. Comfort can also be drawn from various measures in the financing structure of the transaction, which minimise cashflow leakage, including limits on distributions to shareholders and payments on subordinated shareholder advances. Distributions are only allowed after the first redemption of the IMTN, provided that the FSCR is maintained at 1.50 times or above after such payment is made.
As with other private-finance-initiative (PFI) transactions, the timeliness of monthly concession payments from the GoM will be a risk factor as ProHAWK will rely heavily on these payments to meet its obligations under the IMTN. Nevertheless, the Finance Service Reserve Account, which will have a minimum balance equivalent to the principal and profit due on the IMTN for the next 6 months, provides a buffer in the event of payment delays. Meanwhile, asset-management services for the hospital - to be undertaken by ProHAWK - are considered more challenging than other government buildings in terms of scope and service levels. To this end, the Company has engaged an established provider of hospital support services, Edgenta Healthcare Management Sdn Bhd.
ProHAWK is a single-purpose company established to design, finance, develop, construct and commission the WACH within Hospital Kuala Lumpur’s premises, and subsequently undertake asset-management services for the Project. The Company is a 65:35 joint venture between UEM and Najcom Sdn Bhd.
Analytical contact
Kathleen Por
(603) 7628 1015
kathleen@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
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