MARC
has assigned a preliminary rating of AAIS to BEWG (M)
Sdn Bhd’s (BEWG) 8-year RM400 million Sukuk Wakalah with a stable
outlook.
BEWG
is a wholly-owned indirect subsidiary of Hong Kong-based Beijing Enterprises
Water Group Limited (BEWGL), which in turn is a subsidiary of Beijing
Enterprises Holding Limited (BEHL), a state-owned company involved in water,
sewerage and natural gas operations in China. BEWG is undertaking a RM499
million water treatment project in Kemaman, Terengganu, which was awarded by
the Terengganu state government.
The
preliminary rating benefits from a one-notch rating uplift based on the credit
strength of parent BEWGL, the provider of an unconditional and irrevocable
corporate guarantee during the construction phase and a letter of undertaking
to provide liquidity, if necessary, to meet financial obligations on the sukuk
during the post-construction phase. Listed on the Hong Kong Stock Exchange,
BEWGL’s strong credit profile is underpinned by its sizeable market position in
water-related projects in China. The rating also incorporates the strength of
the Terengganu state government, the offtaker of the water treatment project in
Kemaman.
Proceeds
from the Sukuk Wakalah issuance will be used to fund the refurbishment and
upgrading of water treatment and distribution facilities. The project is
expected to be completed in November 2018, three years after works commenced in
November 2015. MARC views the project to have moderate construction risk which
is mitigated by the technical and financial support from BEWGL. The support compensates
for BEWG’s limited operating track record in Malaysia, having only undertaken
the RM983.0 million Pantai 2 Sewage Treatment Plant (Pantai 2 STP) in Kuala
Lumpur in 2015 prior to the Kemaman project. MARC notes that the maiden Pantai
2 STP project was completed on time with no cost overruns.
The
rating agency also views the project completion risk to be minimal considering
the smaller scale of work for the Kemaman project, which will process a
combined 485 million liters per day (MLD) relative to BEWGL’s current water
treatment projects in China, which process a combined 4,190 MLD. However, as of
February 28, 2017, BEWG completed only 12.5% of works against a planned 32.5%,
with the delay attributable to design changes as requested by the Terengganu
state government that have since been finalised. The
project involves refurbishing and upgrading the water treatment plant in Bukit
Sah to its maximum capacity of 255 MLD; constructing a new water intake,
pumping station and service reservoirs as well as piping systems for the
existing Petronas water treatment plant with a design capacity of 230 MLD. The initial construction cost of RM79.0 million was funded from BEWG’s
internal funds with the balance of RM21.0 million to be injected under the
80:20 sukuk and equity financing mix.
During
the construction phase, BEWGL will provide a corporate guarantee to meet any
financial obligations under the terms of the sukuk. The
overall project is scheduled to be handed over to Terengganu state-owned
Syarikat Air Terengganu Sdn Bhd (SATU) in November 2018. The state government will make six annual payments to BEWG totalling
RM686.9 million over a five-year period, commencing within 45 days from the
receipt of Certificate of Practical Completion. The payments will be captured
in a collection account as a build-up towards annual
profit and principal repayments. MARC draws comfort from the requirement to
maintain a minimum balance equivalent to the next six months’ profit and
principal payments in the finance service reserve account (FSRA). The first
deferred payment of RM129.6 million is more than sufficient to meet BEWG’s
first schedule sukuk redemption of RM90.0 million in 2020.
The
company’s cash flow projections indicate that BEWG would achieve a minimum and
average financial service cover ratio (FSCR) of 2.37 times and 2.80 times
respectively during the tenure of the sukuk against the covenanted FSCR of 1.75
times. Based on MARC’s sensitivity analysis, the company’s cash flow can
withstand an increase of 10% in construction costs before breaching its
covenanted FSCR. While the strength of the payment
stream reflects the state government’s ability to meet the scheduled payments,
any potential payment delays and cost overruns are addressed by BEWGL’s
shareholder undertaking. In addition, as dividends to its shareholder and
reimbursement to BEWG can only be made if the project FSCR exceeds 2.00 times
after such payments are made, the sukuk structure is supportive of a build-up
of cash reserves.
The
stable rating outlook incorporates the sufficient protection provided to
sukukholders during the construction and post-construction phases. Any revision
in the rating and/or outlook will hinge on changes in the credit strength of
BEWGL and/or Terengganu state government.
Contacts:
Saifuruddin Othman, +603-2082 2245/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my.
April 4, 2017
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