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

Published on 28 April 2014

RAM Ratings has reaffirmed the AA2/Stable rating of Encorp Systembilt Sdn Bhd’s (ESSB or the Company) RM1.575 billion Sukuk Murabahah (2012/2028) (the Sukuk).
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) dated 9 February 1998.
The rating reflects highly predictable and contractually-backed concession payments from the GoM (via the Ministry of Education), a strong counterparty. Backed by the stream of monthly payments, we envisage the Company registering a “stressed” minimum finance service cover ratio of 1.40 times throughout the tenure of the Sukuk. Further, given that ESSB has fulfilled its obligations under the PA and is not required to operate the quarters, the Company is not exposed to performance or operational risks.
The integrity of the transaction is safeguarded by certain 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. ESSB has also opened and maintained an Escrow Account (as per requirements of the the transaction’s financing terms) that captures monthly concession payments from the GoM. The account is operated solely by the Security Trustee and the funds are 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 monthly payments generally come in within 1-2 months of the invoice dates, there have been previous 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, i.e. 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. Nevertheless, we take comfort in the low likelihood of this occurring, 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 RM69 million (as at May 2028), after the repayment of its final principal payment.

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Robert Ching
(603) 7628 1031
robertching@ram.com.my