Makro Utama Sdn Bhd - 2009

MARC has assigned the rating of A+ID to Makro Utama Sdn Bhd’s (Makro) up to RM100.0 million Al-Istisna’ Bonds (Bonds). Makro is a special purpose vehicle wholly owned by construction and engineering company Redmax Sdn Bhd (Redmax) and incorporated to facilitate the issuance of the Bonds. The Bonds proceeds will be used to repay Redmax’s existing debts, part of which was incurred in relation to the expenses on its RM402.9 million Sungai Muda Package 2 Flood Mitigation Project (Sungai Muda Project) awarded by the Department of Irrigation and Drainage Malaysia or Jabatan Pengairan dan Saliran Malaysia (JPS). The remaining proceeds will fund Redmax’s working capital requirements for the Sungai Muda Project. Redmax is a registered Bumiputera ‘Class A’ contractor which undertakes civil and infrastructure works, and has completed a number of flood mitigation projects in Kedah and Penang.

Progress billing collections from JPS in respect of the Sungai Muda Project will provide the cash flows needed to service the fully-amortising Bonds. The rating therefore reflects the cash flow certainty provided by the Sungai Muda Project, the creditworthiness of JPS as the obligor and Redmax’s good operating track record. It also incorporates the structural features of the issuance which are common to project financing including trustee-controlled accounts which include a finance service account and a sinking fund account. The rating is constrained by site access issues which could result in project completion delay as well as the weak financial profile of its originator/shareholder, Redmax, whose liquidity has been pressured by high working capital requirements. The outlook for the rating is stable.  

The project being undertaken by Redmax comprises the design, build, construction and completion of the flood mitigation works at Sungai Muda, Kedah. MARC believes that Redmax has the requisite experience to complete the project based on its timely completion of its earlier more complex flood mitigation project namely the Sungai Muda (Package 1). Together with the Sungai Perai (Package 1A and 2) project, Redmax has completed flood mitigation projects with an aggregate total value of RM302.9 million.

The fixed price RM402.9 million project will expose Redmax, and consequently Makro, to raw material price fluctuation risk. Mitigating this to some extent is the allowed variation of price (VOP) on 14 specified construction materials including steel and aggregates by the government, effective January 1, 2008. This will facilitate partial pass-through of the price movement to the government. Additionally, the issue structure limits the amount of periodic transfers to Redmax’s operating account from the Revenue Account to RM500,000 every six months from the initial issue date for a total amount not exceeding RM4.5 million. The assigned contract proceeds under the Sungai Muda Project should provide adequate coverage for the Bonds for the given rating level vis-à-vis the RM100.0 million Bonds. The Bonds begins amortizing in 2011, two years after it is first issued with the final scheduled repayment due in 2013.

Rating stability is provided by the combination of the obligor’s (JPS) stable credit outlook, Redmax’s proven track record and the projected adequacy of the project’s cash flow.

Major Rating Factors

Strengths

•  Strong  credit quality of sole obligor, Department of Irrigation and Drainage Malaysia;
•  Proven track record of contractor of having completed similar projects; 
•  The project’s low  technical complexity; and
•  Structural mitigants provide adequate protection against commingling risks.
  
  Challenges/Risks 
   
• Risk of delay in acquisition of land by the state government;
• Non-recourse nature of the financing structure; and
• Weak financial risk profile of the sponsor/shareholder.