Special Port Vehicle Bhd - 2010 Credit Commentary Report

MARC has affirmed the rating of Special Port Vehicle Berhad’s (SPVB) RM1,310.0 million nominal amount asset-backed serial bonds facility at AAA. The rating outlook remains negative.

SPVB is a special purpose entity established with the sole purpose of issuing the receivables-backed serial bonds. SPVB acquired future receivables amounting to RM1,699.63 million (including interest) representing the balance consideration price under a Sale and Purchase Agreement (SPA) dated November 2002 between Kuala Dimensi Sdn Bhd (KDSB) and Port Klang Authority (PKA, or the obligor) in respect of the sale of 999.5 acres of leasehold land at Pulau Indah. The leasehold land has been developed as an integrated commercial and industrial free zone known as Port Klang Free Zone (PKFZ).
 
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 SPA. The federal government has continued to abide by the support letters issued by the Ministry of Transport (MOT), notwithstanding 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 standalone credit profile, as its status as a statutory corporation under the purview of the MOT. The contractual deferred payments to SPVB continue uninterrupted, supporting the timely payment of the bonds, thus far averting payment default on the rated obligations.

Liquidity risk is partly mitigated through the maintenance of six months of debt service reserves in a Finance Service Reserve Account (FSRA), a one-month timing buffer between the projected date of receipts of funds from PKA and the scheduled repayment date of the bonds. As of the date of this report, SPVB has met its covenant in relation to maintaining the required balance in the designated accounts.

MARC has maintained its negative outlook on all the PKFZ-related debt ratings, including SPVB’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.