MARC has affirmed the rating of AAA(s)ID (AAA Support, Islamic Debt) in respect of Sarawak Specialist Hospital & Medical Centre Sdn Bhd’s (SSHMC) Istisna’ Serial Bonds (Bonds). The rating reflects the AAA rating of the Sarawak State Government as the principal and profit payments of the Bonds will be satisfied via proceeds of share subscription payments as evidenced by the back-to-back Redeemable Preference Share (RPS) Subscription Agreements between the State Financial Secretary Incorporated (SFS Inc.) and SSHMC Management and Holdings Sdn Bhd (SSHMC Holdings), and SSHMC Holdings and the Issuer, SSHMC. SFS Inc. is a statutory corporation established under the State Financial Secretary (Incorporated) Ordinance under the laws of Sarawak and controlled by the State.

SSHMC was incorporated in July 2001 to facilitate the construction of Sarawak International Medical Centre (SIMC), a project conceived by the State Government of Sarawak. SSHMC is a wholly-owned subsidiary of SSHMC Holdings which in turn is wholly-owned by SFS Inc. SSHMC’s current paid-up capital is RM50.5 million.

Under the Istisna’ Bonds, SSHMC has issued eight tranches of Primary Bonds with a total value of up to RM425 million raising net proceeds of approximately RM380 million. The issuance of the Bonds took place following the execution of the Share Subscription Agreements, under which the subscriber shall irrevocably and unconditionally subscribe and pay such amount of non-cumulative redeemable preference shares (RPS) into the subscribed company for an amount that corresponds to the Bonds nominal amount which
comprises the principal and profit payments. The payments for the share subscription have been scheduled so as to correspond to the scheduled payments of the Bonds in terms of amount and timing. Each installment payment is credited into a Finance Service Reserve Account (FSRA), an account jointly managed by SSHMC and the Facility Agent for the purpose of the Bonds repayment, one month before each scheduled payment of the Bonds which occurs semiannually. Credit risk and liquidity risk of the Bonds are essentially mitigated.

The project commenced in July 2003 and is expected to complete in July 2006. However, the project is currently behind schedule, due to minor changes in the layout during detailed design development phase, initial problems encountered in the piling works caused by the ground and soil condition, exacerbated by the contractor’s failure to mobilize adequate workers and machinery quickly during the initial stage. As at 30 September 2005, the project was 13.01% completed against targeted completion of 43.13%. The management of SSHMC envisages that there would be a delay of around six months in the completion date.

Given the importance of the project to the state, MARC believes that construction or completion risk is significantly mitigated. The risk is moderated further by the fact that SSHMC is entitled to LAD at the rate of RM50,000 per day, which can be deducted from any monies due to the Contractor as well as recovered from the Performance Bonds. The expected delay of the project completion will not impair the timely payments to bondholders as the payments will be made from proceeds from the subscription of the RPS.