MARC has reaffirmed the ratings of Transshipment Megahub Berhad’s (TMB) RM1,095.0 million bonds and up to RM360.0 million of CP/MTN facility at AAA and MARC-1/AAA respectively. The bonds and CP/MTN are secured by the assignment of rights, titles and benefits to the payment obligations of the Port Kelang Authority (PKA) pursuant to the development agreement and supplemental agreements between PKA and Kuala Dimensi Sdn Bhd (KDSB). TMB is a financing vehicle wholly owned by KDSB. The ratings incorporate a strong reliance on government support given that the obligations of PKA are backed by a letter of support from the Ministry of Transport (MoT), which attests to PKA’s status as a statutory authority under the purview of the MoT and the economic significance of the project. The ratings also reflect the completion of development works and a protective issue structure.

TMB was incorporated solely for the purpose of issuing the bonds and CPs/MTNs; the proceeds of which were used to fund the development of Port Klang Free Zone (PKFZ) amounting to RM1,220.0 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 PKFZ. The development works encompassed the construction of high-tech office and transshipment facilities including customs office check points, light and medium industrial facilities and warehouses. Payment from PKA, which represents the debt servicing means for the rated instruments, will be made on a deferred basis, in six instalment payments by June each year commencing in 2007 with the last instalment payment due in 2012.

Construction works were 100% completed as at 29th September 2006, nine months ahead of the 36 months development period provided for under the Development Agreement (DA). At present, PKA is in the midst of performing its inspection of the completed works. The DA provides for a one year defects/liability period whereby KDSB will be obligated to rectify any faults that arise during that period. Nonetheless, MARC believes that the construction completion risk element of this financing transaction has been largely mitigated, as the early completion of the development works leaves ample time to rectify any defects that may arise. In addition, under the issue structure, a portion of the funds withdrawn will be deposited into the Escrow Account (EA), up to a sum of RM79.0 million which will be used to cover potential shortfalls in the Collection Account and, to cover any increase in interest obligations under the CP/MTN programme. KDSB has also provided an undertaking to replenish the EA up to RM36.0 million, should the balance be inadequate to cover increases in funding costs. As at 31st October 2006, the balance in the EA amounted to RM82.1 million.

Coupons payable on the bonds during the moratorium period are pre-funded by proceeds from the bonds and CP/MTN facility. Liquidity risk is mitigated by the maintenance of six months’ coupon/interest payments for the bonds in the Debt Service Reserve Account; a four-month timing buffer between the projected date of receipt of funds from PKA (assuming payment is made every June) and the scheduled principal repayment of the bonds (every 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.

Developments that may affect the rating include, (a) any failure on KDSB’s part to rectify any defects or technical issues within the stipulated period, should any arise following the conclusion of PKA’s assessment of the completed development, (b) any delay in government processes that might affect the timeliness of PKA’s repayments and (c) any change in government policy or overall health of Malaysia’s economy that may limit the funds available for government expenditure.