The rating assigned is underpinned by the charter contract between Pelangi Shipping Sdn Bhd (PSSB) and the Government; the rental proceeds of which shall be the source of repayment for the BAIS facility; and a tight issue structure. These factors are, however, moderated by the performance risk associated with the contract.

In September 2000, PSSB, the holding company of PSSB Ship Management Sdn Bhd (PSM), entered into a Rental Agreement with the Government in respect of the charter of a vessel for the Royal Malaysian Navy‘s (TLDM) training programme. In return, the Government shall pay PSSB an annual rental payment of RM8.8 million for a tenure of ten (10) years. PSM is a special purpose vehicle established for the sole purpose of capturing the rental proceeds from the Government, which shall serve as the source of repayment for the BAIS facility.

PSSB is responsible for all matters related to the operation, navigation and control of the vessel. The Agreement requires PSSB to provide experienced crew members for the vessel; equip the vessel with the necessary safety equipments; procure the required insurances for the vessel; ensure the vessel is ready for sail; and maintain the vessel. The Government, in turn, is responsible for the fuel and lubricants of the vessel, port payments/levies, fresh water (if needed) and any payments that are Government-related.

Liquidity risk under the transaction is mitigated through the priority ranking accorded to payment obligations under the BAIS. The amount due within the next twelve months under the BAIS shall be credited into the Debt Service Reserve Account (DSRA) out of the annual rental payments received net of statutory payments, but before capital and operating expenditures. In addition, PSSB will also deposit RM500,000 annually into a Sinking Fund Account to ensure sufficient monies for the redemption of the final tranche (RM10 million)

The annual rental payments from the Government lend stability and predictability to PSM’s cash flow. Based upon past records, the Government has been prompt in its rental payments; within 30 days after receiving the invoice, as stipulated in the Agreement. PSM is not expected to incur any capital expenditure, while its operating expenditure would comprise mainly the costs of the crew members, maintenance expenses and insurance premiums. The average and minimum debt service coverage ratio (DSCR) is expected to be 2.2 times over the tenure of the BAIS, comfortably above the covenanted level of 1.5 times.

For the past three financial years, approximately 50% of PSSB’s revenue was derived from the Government’s rental payments. Going forward, PSSB expects freight and handling charges to be the main revenue contributor.

Shareholders’ funds were in deficit by RM313,000 as at 31 December 2003. The shareholders of PSSB recently injected RM1.6 million into the company to strengthen its capital position. [Prior to the injection of the new funds, PSSB’s unaudited management accounts as at 30 September 2004 showed total shareholders’ funds at RM6.4 million.] The equity injection thus demonstrates PSSB’s shareholders’ willingness and ability to inject additional funds into the company, when required.