Wednesday, Dec 20, 2017
MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s (Alpha Circle) Senior Sukuk Musharakah (Senior Sukuk) and Junior Sukuk Musharakah (Junior Sukuk) at AA-IS and AIS respectively. The two-notch rating differential reflects the subordination of the Junior Sukuk to the Senior Sukuk in terms of payment and security. The ratings outlook has been revised to negative from stable. The outstanding under the Senior Sukuk and Junior Sukuk are RM365.0 million and RM55.0 million respectively.
Alpha Circle is the funding vehicle for NERS Sdn Bhd to undertake the registration of foreigners in the country under a 12-year Public-Private Partnership contract ending in 2023. For its service, NERS receives an assured payment stream linked to the volume of foreign workers registered in the country. The ratings affirmation primarily factors in the certainty of payments from the government amounting to RM50.0 for each foreign worker permit issued/renewed and the financing structure that prioritises deposits into the finance service account (FSA) to meet Alpha Circle’s financial obligations.
The revised outlook to negative reflects MARC’s increasing concern on Alpha Circle’s cash flows arising from the impact of recent government policy changes related to foreign worker hire that has led to a decline in the volume of foreign workers. Among these changes are an increase in foreign worker levy and a temporary ban on new hires between February and June 2016 which was done to facilitate a rehiring programme of existing illegal foreign workers in the country. As a result, NERS recorded lower permit issuances/renewals of 1.95 million in 2016, and 1.25 million for 8M2017 (2017 annualised: 1.88 million), compared to above 2.0 million between 2012 and 2015. If this trend persists, Alpha Circle would be at risk of breaching its covenanted financial service cover ratio (FSCR) of 1.75 times.
The aforementioned factors notwithstanding, MARC notes that the legalisation of illegal foreign workers will end on December 31, 2017 and expects new applications for work permits to improve foreign worker volume by end-2018. For financial year ended June 30, 2017 (FY2017), NERS’ revenue was lower at RM92.3 million in line with the lower work permit issuances volume. Against higher sukuk repayment of RM50.0 million in FY2017, the project’s cash flow provided a lower y-o-y FSCR of 1.76 times based on Alpha Circle’s FY2017 unaudited management accounts. Alpha Circle has made a repayment of RM60.0 million in mid-November 2017.
MARC observes that over the medium term, as the reduction limit for the senior sukuk increases from RM65.0 million in November 2018 to the final RM85.0 million in November 2022, Alpha Circle would require a minimum of about 2.1 million foreign worker permits annually to meet the FSCR of 1.75 times. As a cash buffer against volume risk, shareholders plan to advance RM10.0 million to the company by end-June 2018 as well as meet any shortfall should the annual amount received by the project FSA fall below RM85.0 million.
Alpha Circle’s ratings and outlook will hinge on the recovery in volume of foreign worker permit issuances over the near term. The ratings would be downgraded if this volume shows no sign of improving from the current level and/or if government policy on foreign labour further impacts the hiring of foreign workers domestically.
Contacts:
Saifuruddin Othman, +603-2717 2945/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.