Valid Ventures Bhd - 2008

MARC has reaffirmed the AAA and MARC-1/AAA ratings of Valid Ventures Berhad’s (VVB) RM510.0 million fixed rate serial bonds (bonds) and up to RM85.0 million Commercial Paper/Medium Term Notes (CP/MTN) Programme, respectively.

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 VVB, which represents the payment stream for servicing the bonds and CP/MTN programme. Although VBB 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 to PKA to meet its debt servicing obligations. The rating is further supported by a protective issue structure which provides for a six month debt service reserve amongst others.

VVB is a special purpose entity and wholly owned subsidiary of Kuala Dimensi Sdn Bhd (KDSB) 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 Port Klang Free Zone (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 999.5 acres of land in Pulau Indah into a free trade zone area.

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 appeal as a transshipment hub. PKFZ commenced its operations in November 2006.

PKFZ has been managing and marketing the free zone since the withdrawal of Jebel Ali Free Zone International (JAFZI) in July 2007. PKFZ had earlier entered into a 15-year agreement with JAFZI, pursuant to which the latter’s responsibility was to attract foreign investment into the port.

As at 21 January 2008, RM446.46 million of the bonds and CP/MTN facility has been drawndown for the financing of the Additional Development Works. MARC has been informed that the actual physical works have been fully completed with no cost overruns and is currently pending certification from PKA. With the completion of the works, construction risk has been largely eliminated. Under the structure, withdrawal of the bonds and CP/MTN proceeds from the Disbursement Account for payment 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. KDSB has also provided a corporate guarantee to VVB for the construction performance amounting to 5% of the total contract sum.

Payment from PKA which forms the source of repayment for the bonds and CP/MTN is on a deferred basis. The final instalment payment which is variable in nature, comprising interest accrued at 7.5% per annum, was structured to provide incentive for timely completion of works.

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 any increase in interest obligations under the CP/MTN programme. Prefunded coupons from the proceeds of the bonds and CP/MTN, maintenance of a six month coupon/interest for the bonds and CP/MTN in the Debt Service Reserve Account and a three-month buffer period 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, VVB has met its obligations relating to required designated account balances.

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 VVB.