Free Zone Capital Bhd - 2007

MARC has affirmed the rating of Free Zone Capital Berhad’s (FZCB) RM410.0 million fixed rate serial bonds and up to RM70.0 million Commercial Papers/Medium Term Notes (CP/MTN) programme at AAA and AAA/MARC-1 respectively. The ratings carry a stable outlook.

FZCB is a wholly owned subsidiary of Kuala Dimensi Sdn Bhd (KDSB), incorporated solely for the purpose of issuing the fixed rate serial bonds and CP/MTN, the proceeds of which were used to finance the new additional development works of Port Klang Free Zone (PKFZ) estimated at RM335.8 million excluding the variation order and professional fees, which if any, will be financed by the issuance of CP/MTN. The development works of PKFZ encompassed the construction of high-tech office and transhipment facilities including customs office check points, light and medium industrial facilities and warehouses.

The rating reflects the Government of Malaysia’s (GOM) demonstrated willingness and capacity to support the deferred payment obligations of Port Klang Authority (PKA) to FZCB, which represents the payment stream for servicing the fixed rated serial bonds and CP/MTN programme. Although FZCB does not benefit from a direct and timely government guarantee, the government through the Ministry of Transport has provided a letter of support for the bonds and CP/MTN, and has more recently approved funding of up to RM4.63 billion in the form of a soft loan. The rating is further supported by a protective issue structure which provides for a six month debt service reserve amongst others.

The bonds proceeds were used to finance the new additional development works of PKFZ comprising concrete trenching for electric cables; electrical works for 33 KV supply; civil infrastructure works to the main intake station; direct access road from the project site to Westport; and link road from the project site’s main access roads to Westport CT4. Construction is 94.27% complete as of February 2008 and thus the project faces minimal risk of disruption or delay in its completion schedule.

PKA is the coordinator and regulator of port operations within Port Klang and the developer of PKFZ, a fully integrated free commercial and industrial zone. The development of PKFZ is in line with the Government’s policy to develop Port Klang as a regional distribution hub as well as a commercial, industrial and logistics centre. PKFZ is expected to increase Port Klang’s attractiveness as a transhipment hub. PKFZ commenced its operations in November 2006.

The original plan for the development of PKFZ involved a 15-year consultancy agreement and management contract with Jebel Ali Free Zone International (JAFZI) to attract foreign investment and to promote the port. With the withdrawal of JAFZI in July 2007, PKFZ has been managing and marketing the free zone on its own.

Under the structure, drawdown of the bonds and CP/MTN proceeds from the Disbursement Account for payments to KDSB is subject to the submission of Notice of Payment supported by documentary evidence on works done, certified by independent consultants and acknowledged by PKA. In addition, trigger events have been incorporated allowing the trustee to appoint a substitute contractor in the event the actual completion rate is delayed by 20% from the projected completion rate. Notwithstanding, as security against the turnkey developer, KDSB has provided a corporate guarantee to FZCB for construction performance amounting to 5% of the total contract sum.

Liquidity risk is mitigated through the maintenance of an Escrow Account which covers for any potential shortfall in a Collection Account in the event of any delays in construction and to cover for increases in interest obligations under the CP/MTN programme. In addition, the maintenance of six months of coupon/interest payments for the bonds and CP/MTN in the Debt Service Reserve Account and; a three-month timing buffer between the projected date of receipt of funds from PKA and the scheduled principal repayment of the bonds provides further protection. As of November 2007, FZCB has complied with covenants relating to the maintenance of the required balances in the designated accounts.

The stable rating outlook reflects MARC’s expectations that the financial support from the government would continue to be forthcoming in respect of PKA’s obligations to FZCB.