Free Zone Capital Bhd - 2008

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 MARC-1/AAA, respectively. The ratings carry a stable outlook. Wholly-owned by Kuala Dimensi Sdn Bhd (KDSB), FZCB was incorporated solely for the purpose of issuing the fixed rate serial bonds and CP/MTN to mainly finance the additional development works. The bonds and notes are secured by deferred payment receivables from Port Klang Authority (PKA) arising from additional development work undertaken for Port Klang Free Zone (PKFZ) by KDSB. The affirmed ratings continue to reflect the Government of Malaysia’s (GOM) support for the PKFZ, an integrated free commercial and industrial zone situated adjacent to Port Klang, and PKA’s deferred payment obligations relating to the development of PKFZ. Debt service on the bonds and notes are funded from payment made by PKA in respect of its deferred payment obligations. The GOM has, through the Ministry of Transport, provided a letter of support for the bonds and CP/MTN and have to date, provided a soft loan of RM4.63 billion to PKA to cover the development cost of PKFZ. The rating also incorporates a protective issue structure that provides six months of debt service reserves.

The proceeds of the issue were used to finance the new additional development works of PKFZ, undertaken by KDSB, 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 container terminal 4. To date, KDSB has issued cumulative progress billings of RM361.64 million, which exceeds the proceeds raised for additional development works of RM309.59 million from the issuance of serial bonds. FZCB is expected to draw down from the CP/MTN programme to fund the balance of the cumulative progress billings. The CP/MTN proceeds has not been utilised as yet. Construction remained unchanged at 93.75% completed since August 2008, with the delay mainly related to civil works to the main intake station for which the approval from Tenaga Nasional Berhad (TNB) is pending. The risk of failure to satisfy the agreed construction schedule is mitigated largely by KDSB’s commitment to complete the remaining works within the prescribed time frame of six months upon obtaining TNB’s approval.

In addition to the implicit government support extended to the PKFZ project, MARC draws comfort from protective issue structure of the bonds and notes. 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 work done, certified by independent consultants and acknowledged by PKA. In addition, 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 any potential shortfall in a Collection Account in the event of delay in construction and 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 payments from PKA and the scheduled principal repayment of the bonds, provides further protection. As of September 2008, FZCB has complied with covenants related to the maintenance of the required balances in the designated accounts. In July 2008, PKA remitted RM150 million to FZCB for the scheduled payment of coupons and Tranche 1 of the bond in November 2008.

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.

Major Rating Factors

          Strengths

• Government of Malaysia’s (GOM) support for the deferred payment obligations of Port Klang Authority;
• Soft loan from GOM amounting up to RM4.63 billion to PKA for the development of Port Klang Free Zone; and
• Protective features in issue structure.

           Challenges/Risk

• Delay in construction works on main intake station due to pending confirmation on pylon alignment from Tenaga Nasional Berhad.