Published on 21 May 2018.
RAM Ratings has reaffirmed the rating of Encorp Systembilt Sdn Bhd (the Company)’s RM1.575 billion Sukuk Murabahah at AA1/stable. The reaffirmation is premised on the Company’s ability to maintain a minimum finance service coverage ratio (FSCR) of 1.50 times under our stressed scenario, commensurate with an AA1 rating. Encorp Systembilt’s strong financial coverage is supported by cash accumulated through the consistent receipt of contractual payments from the Government of Malaysia (GoM), sturdy investment income and low expenses.
The Company enjoys highly predictable, contractually backed monthly payments from the GoM (via the Ministry of Education (MoE)). These payments are not conditional on performance as Encorp Systembilt is not required to carry out maintenance work on the teachers’ quarters that it had built under its concession. As such, operating expenses are expected to remain minimal. Notably, cashflow leakages are minimised by tight covenants and structural features such as a prohibition against the declaration of dividends and a limitation on additional debt incurrence.
Despite a low degree of counterparty risk, Encorp Systembilt is still susceptible to the possibility of delayed payments. Given that these payments are the Company’s 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. This was evident in early 2018 when administrative hurdles following the MoE’s adoption of a new payment system had resulted in an unexpected hold-up in monies due for January and February 2018. Nevertheless, these funds were eventually received in April 2018. We expect the payment pattern to normalise going forward, given that dues for March 2018 had been received in April, in line with the historical one to two months from the invoice date.
Meanwhile, as the last tranche of the Sukuk matures three months after the expiry of the concession in February 2028, there will be little room to refinance or restructure the facility, should the need arise. However, the need for refinancing will be low, in our view, as payments from the GoM are expected to adequately cover the repayment of the Sukuk. The build-up of cash from investment income is also a supporting factor in this regard, considering Encorp Systembilt’s inability to distribute dividends. In our stressed analysis, the Company’s cash balances after its final principal payment would be equivalent to a buffer of approximately seven months’ contractual payments from the GoM.
Encorp Systembilt 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.
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