IJN Capital Sdn Bhd - 2010

MARC has affirmed its AAAIS rating on the outstanding RM80 million of Sukuk issued under IJN Capital Sdn Bhd's (IJN Capital) RM209 million Sukuk Musyarakah Programme. The outlook is stable. IJN Capital is a special purpose funding entity wholly-owned by IJN Holdings Sdn Bhd (IJN Holdings). The rating on the Sukuk, which will be maturing in 2011 through 2013, incorporates a single notch uplift from the senior unsecured debt rating for IJN Group based on the structural protection afforded by a revenue reserve account that currently captures 20% of all payments received from the government in respect of patient receivables. Funded at RM73.2 million as at end-August, 2010, the reserve account balance is sufficient to cover Sukuk redemptions through 2012.

The programme allows IJN Capital to issue additional Sukuk maturing in 2014 through 2016, of up to RM109 million. These issuances will not benefit from the same structural protection that is available to current outstanding Sukuk. The main operating entity within the IJN Group and operator of the national cardiac hospital, Institut Jantung Negara Sdn Bhd (IJN), will instead transfer funds progressively into a deferred payment reserve account ahead of scheduled distribution dates. MARC has affirmed its rating on the potential issuance of RM109 million Sukuk at AA+IS with a stable outlook in line with IJN Group's implied senior unsecured debt rating.

IJN Group's AA+IS implied senior unsecured debt rating continues to be primarily driven by the creditworthiness of Institut Jantung Negara Sdn Bhd (IJN), the main operating entity within the IJN Group and operator of the national cardiac hospital. The rating incorporates the hospital's position as the country's leading cardiovascular and thoracic centre and the financial support provided to IJN Group by its 99.9% shareholder, the Ministry of Finance (MoF). These credit strengths are moderated by its weak financial performance and regulated fee structure which has lagged increases in operating costs. Its credit profile is currently sustained by its robust liquidity position that has been bolstered by advances from the MoF during the last two financial years.

The cardiac hospital's regulated fee structure has remained unchanged since 2003, a reflection of its mandate to provide affordable cardiac care for the public. Its patient profile, currently dominated by government employees and their dependants, pensioners and the underprivileged, continues to be the second major constraint on profitability. The hospital's new wing which became fully operational as of July 2010 has increased IJN's capacity to 408 beds and seven operating theatres from 274 beds and five operating theatres. The higher depreciation costs have been a drag on profitability, although reported negative free cash generation has reduced with the group's capital spending cycle coming to an end.

IJN Group reported revenues of RM305.1 million for the financial year ended December 31, 2009, 4.5% up from RM292.1 million in FY2008. Profitability was affected by higher operating costs, stemming from higher medical supply and staff costs, and depreciation expenses of the hospital's new wing. Free cash flow remained negative, albeit reduced to RM40.9 million from RM80.9 million in FY2008. The group had year ending cash and bank balances of RM291.1 million in FY2009, partly derived from shareholder advances totalling RM195.0 million during FY2008 and FY2009.

The stable outlooks for both ratings anticipate continued paydown of debt and sustained debt protection measures.

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