Transshipment Megahub Berhad (TMB) is a wholly owned subsidiary of Kuala Dimensi Sdn Bhd (KDSB), with the principal activities of issuing RM1,095.0 million fixed-rate serial bonds and up to RM360.0 million Commercial Papers/Medium Term Notes (CP/MTN) and financing the development of Port Klang Free Zone/Transshipment Megahub amounting to RM1,220.0 million for KDSB. KDSB was appointed by Port Kelang Authority (PKA) as the turnkey developer to design, build, complete and finance the development of a 999.5-acre land in Pulau Indah into a Port Klang Free Zone/Transshipment Megahub.

Under the Development Agreement (DA) dated 27th February 2003 and Supplemental Agreements (SA) dated 26th May 2003 and 27th March 2004, the development of the Port Klang Free Zone/Transshipment Megahub encompassing high-tech office, transhipment facilities, light and medium industry facilities and warehouses is estimated at RM1 billion. After taking into account professional fees and variation orders, the total project cost is projected to be RM1.32 billion. After the initial payment of RM100 million had been extended to KDSB in July 2004, the balance of the payments from PKA is payable on deferred payment basis, amounting to RM230 million per annum from 2007 to 2011 and the last payment in 2012 will comprise of interest accrued on balance payable to KDSB at 7.5% per annum, professional fees and any variation orders which will be assigned to the bondholders and CP/MTN holders. Since the repayment in 2012 is subject to the progress of development works, the amount will reduce should there be development/construction delays. Although the development period has been budgeted in the DA for a period of 3 years from the date KDSB obtains the last approval from the relevant authorities pursuant to the approved plans, KDSB anticipates that development works will be completed within 24 months. Based on a 24-month development timeframe, the last payment instalment from PKA will amount to approximately RM583.40 million.

Design and construction risks in respect of the development works are considered manageable given the moderate technical nature of such works. To mitigate construction risk and minimise cashflow leakages, withdrawal of the RM1,220 million from the Disbursement Account for payments to the turnkey developer, KDSB, is controlled whereby the withdrawals shall be subject to the submission of invoices/ documentary evidence on works done, certified by an independent consultant on a monthly basis. Given the fixed sum contract entered with the main contractor, any cost overruns shall be assumed by KDSB. In addition, the absolute legal assignment of the payment from PKA ensures that it has no right to set-off Liquidated Ascertained Damages (LADs) against the payment amount. In the event of non-performance by the appointed contractor, TMB has the right to appoint a substitute contractor to resume, complete and deliver the site to PKA. TMB shall have step-in-rights to rectify defaults by way of assignments and power of attorney for such assignments.

Construction risk is further mitigated as KDSB is required to remit an amount of up to RM79 million to the Escrow Account. Funds in the Escrow Account will be used to cover for potential shortfall in the Collection Account should development works extend up to 39 months; 15 months beyond the projected development period; and to cover for any increase in interest obligations under the CP/MTN programme. Should the balance in the Escrow Account be inadequate to cover for increases in funding costs, KDSB has provided an undertaking to replenish the Escrow Account up to RM36 million.

During the 30-month moratorium period, before commencement of payments from PKA, interest servicing obligations for the bonds will be covered by funds prefunded out of the bond proceeds amounting to RM193.66 million, thus, mitigating liquidity risk during the said period. Liquidity risk is also mitigated by the maintenance of a six months coupon/interest for the bonds and CP/MTN in the Debt Service Reserve Account; a four-month timing buffer between the projected date of receipt of funds from PKA (every June) and the scheduled principal repayment of the bonds (every October/November) from 2007 to 2012; and the excess spread between the interest earned on the deferred payment by PKA and interest payable on the bonds.