MARC has assigned ratings of AAA and AAA/MARC-1 to Free Zone Capital Berhad’s (FZCB) proposed issuance of RM410.0 million fixed-rate serial bonds and up to RM70.0 million Commercial Papers/Medium Term Notes (CP/MTN) respectively. The ratings are premised on the Government of Malaysia’s (GOM) backing of Port Kelang Authority (PKA), a statutory authority, to undertake the GOM’s project; the national importance of the project evidenced by the letter of support issued by the GOM in favour of the Trustee and protective issue structure whereby tight control over withdrawals from the disbursement account coupled with features which substantially mitigate liquidity risk throughout the tenure of the proposed bonds and CP/MTN.

FZCB is a wholly owned subsidiary of Kuala Dimensi Sdn Bhd (KDSB), incorporated solely for the purpose of issuing RM410.0 million of bonds and up to RM70.0 million CP/MTN. The bonds proceeds will be utilized to finance the new additional development works of Port Klang Free Zone/Transshipment Megahub (PKFZ) comprising concrete trenching for electric cables (33 KV from the main intake station Pulau Indah to the project site, 11 KV from main distribution station to the project site, 33 KV from main distribution station No 1 to Precinct 2 and Precinct 8 and 11 KV within the project site); electrical works for 33 KV supply to Precinct 2 and 8; civil infrastructure works to the main intake station at the project; direct access road from the project site to Westport; and link road from project site’s main access roads to Westport CT4 (New Additional Development Works). The project carries a total contract cost estimated at RM335.8 million excluding the variation order and professional fees. The variation order and the corresponding professional fees for the New Additional Development Works, if any, will be financed by the issuance of CP/MTN up to RM70.0 million.

KDSB was appointed by PKA as the turnkey developer to design, build, complete and finance the development of a 999.5-acre land in Pulau Indah into a PKFZ via a Development Agreement dated 27th February 2003 (DA) and Supplemental Agreements dated 26th May 2003, 27th March 2004 and 30th November 2005. A Supplemental Agreement dated 26 April 2006 (SA) was executed between PKA and KDSB for the New Additional Development Works whereby total payment from PKA is estimated to be RM522.584 million (including professional fees, variation order and interest accrued on works done). Payment from PKA will be on a deferred payment basis, amounting to RM150.0 million per annum in 2008 and 2009 and the last payment in 2010 comprising of interest accrued on balance payable to KDSB at 7.5% per annum, professional fees and any variation order, all of which will be assigned to FZCB under an absolute legal assignment; the assignment of which forms as a security to the bondholders and CP/MTN holders. MARC notes that the final payment in 2010 is subject to the progress of the New Additional Development Works whereby the amount will reduce should there be any construction delays. Construction works is to be carried out for a period of 24 months and based on the stipulated construction timeframe, and the last instalment payment from PKA will amount to approximately RM222.584 million inclusive of variation order estimated at RM67.16 million.

Design and construction risks in respect of the development works are considered manageable given the moderate technical nature of such works. Under the structure, cashflow leakages are minimised as the withdrawal of the bonds and CP/MTN proceeds from the Disbursement Account for payments to the turnkey developer, KDSB, is subject to the submission of Notice of Payment which are supported by documentary evidence on works done, certified by independent consultants on a monthly basis and acknowledged by PKA. Given the fixed sum contract entered with the main contractor, being Wijaya Baru Sdn Bhd, any cost overruns shall be assumed by the contractor. In the event of non-performance by the appointed contractor, FZCB has the right to appoint a substitute contractor to resume, complete and deliver the site to PKA as provided under the absolute legal assignment. Furthermore, to mitigate completion risk, under the structure, trigger events have been incorporated which will allow the trustee to proceed with the appointment of a substitute contractor in the event the actual completion rate is delayed or lagged by 20% from the projected completion rate. Notwithstanding, as security against KDSB’s performance as the turnkey developer, KDSB is required to provide a corporate guarantee to FZCB for the performance of New Additional Development Works amounting to 5% of the total contract sum. MARC notes that the current development works undertaken by KDSB for PKFZ via Transhipment Megahub Berhad and Valid Ventures Berhad have been completed on a timely basis and views this positively.

Funds in the Escrow Account (EA) will further mitigate construction risk, whereby KDSB is required to deposit RM45 million from the bonds proceeds upon initial drawdown and progressively remit up to RM35.46 million into the EA as withdrawals are made from the Disbursement Account as KDSB submits the Notice of Payment in respect of completed works on a monthly basis. The purpose of the EA is to cover for any potential shortfall in the Collection Account in the event of any delays in construction beyond the 24-months timeframe up to 30-months; and to cover for any increase in interest obligations under the CP/MTN programme. Upon completion of the New Additional Development Works, KDSB will ensure that a balance of RM6.5 million remains at all times in the EA to cover for any increase in funding costs.

From the date of issuance of the bonds until July 2008 (initial payment from PKA), interest servicing obligations for the bonds will be covered by funds prefunded out of the bonds equivalent to more than 18 months but less than 24 months, thus, mitigating liquidity risk during the said period. Liquidity risk is further mitigated by the maintenance of a six month coupon/interest for the bonds and CP/MTN in the Debt Service Reserve Account and; a three-month timing buffer between the projected date of receipt of funds from PKA (every July) and the scheduled principal repayment of the bonds (every November) from 2008 to 2010.