Free Zone Capital Bhd - 2010 Credit Commentary Report

MARC has affirmed the rating of Free Zone Capital Berhad’s (FZCB) RM410.0 million fixed rate serial bonds (FRSB) at AAA. The rating outlook remains negative. Concurrently, MARC has withdrawn its MARC-1/AAA ratings on FZCB’s undrawn RM70.0 million Commercial Papers/Medium Term Notes (CP/MTN) facilities which had recently been cancelled.

Wholly-owned by Kuala Dimensi Sdn Bhd (KDSB), FZCB was incorporated solely for the purpose of issuing the FRSB and CP/MTN to finance new additional development works. The bonds and notes are secured by deferred payment receivables from Port Klang Authority (PKA) arising from the new additional development work undertaken for Port Klang Free Zone (PKFZ) by KDSB.

The affirmed rating reflects MARC's continued alignment of the rating with the fundamental creditworthiness of the federal government of Malaysia on the basis of the latter's willingness and capacity to support the deferred obligations of PKA under the respective agreements in relation to the development works of PKFZ. The federal government has continued to abide by the support letters issued by the Ministry of Transport (MOT), notwithstanding uncovered irregularities surrounding the issuance of the four letters and ongoing legal suits against turnkey developer KDSB.

The PKFZ project was initiated and endorsed by the government with the objective of elevating the status of Port Klang into a national load centre and regional transshipment hub. The project's actual occupancy remains low and is still generating insufficient revenue to cover its operating expenses. PKA's payments to KDSB continue to be largely funded by an RM4,632 million soft loan from the Ministry of Finance. The committed nature of the repayment source for the rated obligations continues to mitigate PKA's weak stand-alone credit profile, as its status as a statutory corporation under the purview of the MOT. The contractual deferred payments to FZCB continue uninterrupted, supporting the timely payment of the bonds, thus far averting payment default on the rated obligations.

MARC has maintained its negative outlook on all the PKFZ-related debt ratings, including FZCB’s, to reflect the possibility of waning government support over time for the full and timely payment of obligations as a result of the perceived RM4,632 million bail-out by the government and ongoing legal suits pursued by PKA on KDSB. While a revision of MARC's support assumptions will very likely result in negative rating pressure, there are no recent developments to warrant a change in the support assumption. Since our last rating action on January 7, 2010, further affirmative statements by government officials pertaining to support for the deferred payment obligations of PKA have been noted. The negative outlook also incorporates increased uncertainty as to the timeliness of payment transfers from PKA, as witnessed with earlier incidences of non-compliance with the required build-up of debt reserves ahead of payment dates. The foregoing increases the risk of a credit cliff situation in which the debt rating(s) of one or more of the four issuers could be lowered to 'D' upon the occurrence of missed payment.