ALPHA CIRCLE SDN BHD - 2016

MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s (Alpha Circle) RM540 million Senior Sukuk Musharakah (Senior Sukuk) and RM55 million Junior Sukuk Musharakah (Junior Sukuk) at AA-_IS and A_IS respectively with a stable outlook. The two-notch rating differential reflects the subordination of the Junior Sukuk to the Senior Sukuk in terms of payment and security. As at end-November 2016, the outstanding Senior and Junior Sukuk were RM425.0 million and RM55.0 million respectively.

Alpha Circle is the funding vehicle for NERS Sdn Bhd, which holds a 12-year Public-Private Partnership (PPP) contract ending in 2023 to undertake the registration of foreigners in the country. For its service, NERS receives an assured payment stream linked to the volume of registered foreign workers in the country at RM50 per foreign worker permit issued/renewed. MARC continues to regard the volume of registered foreign workers as a key risk in assessing NERS’ financial health. Consequently, government policy on foreign labour, dictated by economic and social considerations, remains the main driver of volume risk. This has been evident in the decline of volume of registered foreign workers following the government’s measure to implement a hiring freeze of new foreign workers in February 2016, which led to NERS recording 2.03 million registered workers as at end-June 30, 2016 as compared to 2.27 million in the previous corresponding period.

The ratings affirmation factors in MARC’s expectations that Alpha Circle’s cash flow buffers would improve over the near term following the partial uplift of the hiring freeze on foreign workers in May 2016 specifically for four major sectors, namely manufacturing, plantation, construction and furniture-making. Additionally, the eventual issuance of work permits to about 150,000 illegal workers under the government’s rehiring programme would potentially add to the volume of foreign workers.

Under the 80:20 distribution mechanism between the Finance Service Account (FSA) and Operations Account, payments trapped in the FSA are used to meet profit and principal payments under the programme reduction schedule. For FY2016, the decline in foreign labour force led to lower payment collection of RM99.0 million (FY2015: RM112.2 million). However, over the medium term as the annual repayment increases, Alpha Circle’s cash position could come under pressure, in particular if the number of registered workers decline from current levels. Should the number decrease below 2.0 million level, a breach in the covenanted FSCR of 1.75 times (x) would occur in 2018 (FY2016: 1.88x). In MARC’s project cash flow sensitivity analysis, the breakeven level is 1.91 million before the company’s repayment capacity is impaired at the end of the rated programme. The sukuk’s maturity profile continues to pose rollover risk given that RM160 million sukuk will mature in November 2017 against the reduction amount of RM60 million.

The stable outlook reflects MARC’s expectations that foreign worker volume will recover to historical levels and remain supportive of Alpha Circle’s ability to meet its obligations under the terms of the sukuk programme. The ratings would be pressured if the volume of foreign workers continues to decline to below the 2.0 million level that could lead to a negative deviation in the projected cash flows.

Major Rating Factors

Strengths

• Assured payment stream from the Malaysian government.

Challenges/ Risks

• High susceptibility to government policy on migrant workers; and
• Exposure to rollover risk with respect to current issued sukuk maturity profile.