Malaysian International Tuna Port Sdn Bhd - 2008

MARC has revised its rating outlook on MITP’s BAIS facility of up to RM240.0 million to developing from stable. Concurrently, MARC has affirmed its rating of A+ID on MITP's BAIS. The outlook revision follows an estimated six-month delay in the completion of major construction works at the tuna port following a stop-work order issued by the DOE which has yet to be lifted. This negative development has resulted in cost overruns in construction. Consequently, MARC believes that MITP will be heavily reliant on income and cash flow from MITP's trading and processing operating subsidiaries to meet profit payments on the BAIS. Failure on the part of these subsidiaries to achieve projected income could adversely affect MITP's debt servicing capacity. The amortization of the BAIS which starts only in 2012 will, nonetheless, afford MITP some flexibility and room to address its current construction challenges. Additionally, MITP’s close ties to the government, which remain unchanged since the initial rating, provides some assurance of financial assistance if and when required. Notwithstanding, if the stop work order persists and contractors are unable to proceed on target under the revised construction schedule, downward rating movement could result in the absence of other offsetting positive development on the project.

The affirmed A+ID rating continues to reflect strong perceived government support for the tuna port privatisation project on the basis of a letter of support issued by the MOA to back the rated obligations and the 40% shareholding in MITP held by government agency, Lembaga Kemajuan Ikan Malaysia (Fisheries Development Authority of Malaysia or LKIM). LKIM 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. To a lesser extent, the rating also reflects the fair prospects for the tuna fishing in the region.

The port is currently under its final phase of construction. LKIM had earlier granted an extension of time from the original scheduled completion date of 17 September 2008 to 31 May 2009. Construction had only commenced in June 2007 following delay in obtaining approval for the early commencement of the project from local authorities. However, following the stop-work order issued by the DOE, construction  works have been suspended since September 2007, resulting in estimated cost overruns of RM5 million, which will be wholly borne by MITP. Any significant cost overruns are likely to necessitate additional funding from shareholders, Bindforce Sdn Bhd (Bindforce) and LKIM. As at end-May 2008, about 18.5% of construction had been completed, against the scheduled construction progress of 40%. MARC is satisfied that the contractor for the dredging works, See Song & Sons Sdn Bhd, the turnkey contract and security arrangements do not expose MITP to major additional risks. Full commercial operation remains scheduled by June 2010.

Once MITP is fully operational, it will be competing against more established fishery ports in the region for a share of discretionary vessel landings. As MITP will only be able to establish a predictable vessel landing profile with the passage of time, there is a risk that actual revenue and cash flow will be lower than projected under the base case financial model. Additionally, MITP’s highly geared financial structure provides limited downside protection for adverse conditions.

MARC also believes that the current European Union ban on processed seafood from Malaysia will pose additional challenges to MITP if it is not lifted before the tuna port moves fully into commercial operation.

MITP was incorporated in 2004 as a 60:40 joint venture between Bindforce and LKIM to undertake the privatization of the tuna port at Batu Maung, Pulau Pinang. The port is to be developed into a fully integrated fisheries port, using the proceeds of the BAIS to finance the third phase of construction works at the port.

Major Rating Factors

Strengths

• Government’s 40% stake in Malaysian International Tuna Port Sdn Bhd (MITP) and Letter of Support for MITP’s obligations under the Bai’ Bithaman Ajil Islamic Securities (BAIS) issued by the Ministry of Agriculture and Agro-Based Industry (MOA);
• Sufficient levels of tuna stocks in the Indian Ocean to support domestic tuna industry and minimal utilisation of Malaysian landing quota; and
• Project is of national interest.

Challenges/Risks

• Construction delay due to issuance of a stop-work order by Department of Environment (DOE);
• Securing sustained and adequate levels of orders for seafood to meet projected trading and processing income;
• Attracting tuna fishing boats operating in the Indian Ocean  to land their catches in Malaysia; and 
• Competition from neighbouring deep-sea fishing ports in Thailand and Indonesia.