Assar Chemicals Sdn Bhd - 2007

Major Rating Factors

Strengths

• Predictable earnings and cashflow that derives from contractual tariff payments by creditworthy terminal users;
• Tariffs are designed to allow for the recovery of costs and an appropriate rate of return; and
• Favourable operating profile of the independent oil terminal (“IOT”).

Challenges/Risks

• Modest level of financial flexibility; and
• Susceptibility of the IOT to event risk (particularly, fire).

Rationale         The rating of Assar Chemicals Sdn Bhd’s (“ACSB”) RM150 million Serial Sukuk Musyarakah (“Sukuk”) has been reaffirmed at AAAIS.  The rating outlook is stable.

ACSB was incorporated to undertake the construction and operation of an IOT in Senari, Kuching. The reaffirmed rating reflects the timely completion of the project, the credit quality of terminal users, and the favourable 30-year User Agreements between ACSB and the users that govern the contractual tariff payments which, in turn provide the required cashflow to service the Sukuk to allow full recovery. The stable rating outlook is based on the proven record of receiving monthly tariffs from the users, PETRONAS Dagangan Berhad (“PDB”) and Shell Timur Sdn Bhd (“STSB”) and the terminal’s adequate operating performance.

ACSB is wholly-owned by Assar Senari Sdn Bhd, which is 80% owned by Assar Senari Holdings Sdn Bhd and 20% owned by Yayasan Sarawak, a Sarawak state-owned agency. Assar Senari Holdings Sdn Bhd, the ultimate holding company of ACSB, is an approved port operator at Senari, near Kuching Port Authority’s Terminal. The issuance of the Sukuk is made under the principles of Musyarakah. Sukukholders have an undivided proportionate beneficial interest in the Musyarakah venture which owns the IOT. The IOT is leased back to ACSB in return for lease rentals which will be used to service profit payments on the Sukuk and to meet serial redemption of the Sukuk.

The IOT project was completed as scheduled in October 2006 without incurring any cost overruns and commenced commercial operation on January 1, 2007. The project serves as the storage terminal of petroleum products for PDB and STSB. The IOT operator is IOT Management Sdn Bhd which is 70% owned by ACSB’s parent, Assar Senari Sdn Bhd. The IOT users, PDB and STSB have shareholdings of 20% and 10% respectively in the terminal operator. The users pay monthly operating fees directly to the operator.

Revenue generated from LPG and bulk petroleum throughput amounted to RM16.3 million for the eight months ending August 2007. Monthly tariffs, as defined in the User Agreements, are structured to allow reimbursement of all agreed operation costs, financing costs and capital expenditure by the terminal users. In spite of deviations from forecast usage, the tariff structure enables ACSB to generate a predictable and stable income stream. Monthly tariff payments from both users have been prompt, as evidenced by a healthy debtors’ aging profile. Users are discouraged from making late payments by way of imposing additional interest charges. The company’s financial performance should continue to be commensurate with the current rating. As at 31 December 2006, ACSB was in compliance with its financial covenants under the Sukuk issuance. Based on MARC’s calculation, ACSB’s finance service cover ratio (“FSCR”) was above the minimum covenanted level of 1.2 times whilst its debt to equity ratio of 3.8 times was below the maximum covenanted level of 4.0 times.