MARC has reaffirmed Sarawak Specialist Hospital & Medical Centre Sdn Bhd’s (SSHMC) Istisna’ Serial Bonds (Bonds) rating at AAA(s)ID (AAA Support, Islamic Debt). The rating reflects the AAA rating of the Sarawak State Government; since the source of funds to service the principal and profit for the Bonds will come directly from Sarawak State Government. The payments by SSHMC to the bondholders mirror the receipts of the proceeds from the Redeemable Preference Share (RPS) subscription agreement entered into between State Financial Secretary Incorporated (SFS Inc.) and SSHMC Management and Holdings Sdn Bhd (SSHMC Holdings), which in turn has a back-to-back RPS subscription agreement with SSHMC. SFS Inc. is a statutory corporation established under the State Financial Secretary (Incorporated) Ordinance under the laws of Sarawak and is 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 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, of which payments are used exclusively to satisfy the principal and profit payments of the bond. 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. This essentially mitigates the credit risk and liquidity risk of the Bonds.

The project which commenced in July 2003 is expected to be completed in July 2006. However, SSHMC has granted an extension of 169 days to the Contractor to complete the project. As at 30 September 2006, overall physical progress for the project is approximately 50% against targeted progress of approximately 75%. The delay was due to inclement weather, material shortage (diesel and cement) and expected Variation Order, besides initial problem encountered in the piling work caused by the ground/soil condition. The management foresees that the project could not be completed by year end and the new expected completion time is by the second half of 2007.

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. Nevertheless, any delay in the completion of the project will not impair the timely payments to bondholders as the payments will be made from proceeds from the subscription of the RPS.