MARC has affirmed the ratings of Valid Ventures Berhad’s (VVB) RM510.0 million fixed rate serial bonds (bonds) and up to RM85.0 million of Commercial Papers/Medium Term Notes (CP/MTN) facilities at AAA and MARC-1/AAA respectively. The bonds and CP/MTN are secured by the assignment of rights, titles and benefit of the payment obligations by Port Klang Authority (PKA), pursuant to the Development Agreement (DA) and Supplemental Agreements (SA) between PKA and Kuala Dimensi Sdn Bhd (KDSB). The ratings are a reflection of amongst others, a strong reliance on government support of PKA’s obligations backed by the letter of support from the Ministry of Transport (MOT), which attest to PKA’s status as a statutory authority under the purview of MOT and economic significance of Port Klang Free Zone (PKFZ). The ratings are further reinforced by the protective issue structure and the status of the additional development works as at December 2006.

VVB a special purpose entity and wholly owned subsidiary of KDSB, was incorporated for the sole purpose of issuing RM510.0 million of bonds and up to RM85.0 million CP/MTN, to finance junction improvements, electrical infrastructure works and construction of a business class hotel (Additional Development Works) on PKFZ with a total contract cost estimated at RM510.38 million (excluding the variation order). 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 free trade zone area. On 30 November 2005, PKA and KDSB entered into a supplement agreement for the construction of Additional Developments Works at PKFZ.

With target completion ranging from 12 to 24 months, progress of works has been satisfactory with completion at 77.95%, 1.43% ahead of schedule. MARC expects the Additional Developments Works to be completed within the stipulated time frame.

Construction risk is partially mitigated in view of the experience of the contractor and their track record thus far. Construction risk is addressed by the tight control over withdrawals from the disbursement account by KDSB (92% of balance in the disbursement account), which is only allowed with submission of invoices/documentary evidence of works done on a monthly basis. The risk of construction delays has also been factored into the transaction with monthly build up in the escrow account (EA) up to RM47.6 million (8% of balance in the disbursement account).

Payment from PKA which forms the source of repayment for the bonds and CP/MTN is on a deferred basis, amounting to RM150.0 million per annum from 2007 to 2009; RM120.0 million in 2010 and the final instalment payment in 2011 estimated at RM156.5 million. The final instalment payment which is variable in nature, comprises interest accrued at 7.5% per annum and structured to incentivise timely completion of works whereby the amount will be higher the earlier the works are completed or vice versa.

Liquidity risk is substantially mitigated as coupons payable during the moratorium period are pre-funded by proceeds from the bonds and CP/MTN; maintenance of six months’ coupon payments for the bonds in the debt service account; and, the excess spread between the interest earned on deferred payment by PKA and interest payable on the bonds. As at 31 December 2006, the balance in the EA amounted to RM31.99 million. In addition, the higher chargeable interest to 7.5%, will provide better liquidity coverage for VVB in the event of any construction delays or increase in interest rates.