MARC has assigned a long-term debt rating of A+ID to Malaysian International Tuna Port Sdn Bhd’s (MITP)’s proposed Bai’ Bithaman Ajil Islamic Securities (BAIS) facility of up to RM240 million.

The A+ID rating incorporates a strong reliance on government support for the highly visible tuna port privatisation project based on a Letter of Support issued by the Ministry of Agriculture and Agro-Based Industry (MOA) to back the rated obligations. The Letter of Support essentially states that the Government of Malaysia (GOM) through a statutory body, Lembaga Kemajuan Ikan Malaysia (Fisheries Development Authority of Malaysia or LKIM), will ensure that MITP is in the position to meet its obligations under the BAIS facility. LKIM has a 40% ownership interest in MITP, and possesses step-in rights that enable the former to assume the operations of the port in the event of a default under the concession by MITP. MARC’s assessment of the strength of government support considers the importance of the project, the perceived intent of both MOA and LKIM, and finally, the financial stature of the supporter. MITP’s close ties to the government are expected to remain unaltered in the medium-term.

The rating also reflects the following risks:

· The construction programme is currently in its final and most significant phase, with a remaining construction period of two years. Although MITP has opted for a turnkey contract providing liquidated damages to minimize the risk of cost overruns, MARC is concerned that the unrated contractor has a limited and uncertain capacity to assume most of the project’s construction risk;

· The project carries a slight risk that additional cash might be needed to fund changes in the scope of construction in the event of a necessary variation. If additional funds are required, both shareholders, Bindforce Sdn Bhd (Bindforce) and LKIM may have to procure the necessary cash;

· MITP will be competing against more established regional fishery ports for a share of discretionary vessel landings. There are already four established tuna ports in the region, namely, Bali Port in Indonesia, Phuket Port in Thailand, and Trincomalee Port and Galle Port in Sri Lanka. Similar infrastructure developments in the region may yield added competition going forward. A highly competitive environment would limit MITP’s ability to raise port charges;

· MITP will only be able to establish a predictable vessel landing profile with the passage of time. Vessel landings are influenced by a number of factors including the economics of tuna fishing, which of late, has been affected by fuel price; the sustainability of fishery resources; and the implementation of measures to prevent overfishing by national fisheries regulators and regional fisheries organizations such as limits on fishing capacity (vessel numbers), cuts in take of overfished tuna stocks and area/time closures;

· This is MITP’s, and key project participant, Bindforce’s, initial operation of a project of this nature;

· There is considerable uncertainty as to whether assumed growth rates in key revenue and cash flow line items will be achieved given the short operating history of the port. Diesel trading, the largest revenue component in the base case financial projections, is susceptible to developments in diesel supply arrangements, and pricing (in respect of which there is an inherent regulatory element). Significantly lower revenue numbers would have an impact on the robustness of debt service coverages; and

· MITP’s highly geared financial structure constrains the company’s ability to absorb any unexpected cash flow development.

MITP was incorporated in 2004 to undertake the privatization of the tuna port at Batu Maung, Pulau Pinang. It is a joint venture company Bindforce (60% interest) and LKIM (40% interest). The port is to be developed into a fully integrated fisheries port specializing in tuna by the year 2008. MITP is using the proceeds of the BAIS to finance the third phase of construction works at the port.