Makro Utama Sdn Bhd - 2010

MARC has affirmed its A+ID rating on Makro Utama Sdn Bhd’s (Makro) RM100.0 million Al-Istisna’ Bonds (the bonds) with a stable outlook. Makro is a special purpose funding vehicle of construction and engineering company Redmax Sdn Bhd (Redmax) established to facilitate issuance of the bonds. The fully-amortising bonds will be serviced through a Finance Service Account (FSA) and Sinking Fund Account (SFA) with funds provided by progress payments under the Sungai Muda Package 2 Flood Mitigation Project (SM2) awarded to Redmax by the Department of Irrigation and Drainage, or Jabatan Pengairan dan Saliran (JPS), a federal agency. The affirmed rating reflects the strong credit quality of JPS, satisfactory progress made on the project and adequate ring-fencing of project proceeds. The credit strengths are tempered by the weakened credit profile of Redmax.

Redmax, the 100% parent of Makro and turnkey contractor for SM2, is a construction and engineering company focused on infrastructure development, flood mitigation and building works. Redmax has completed a number of flood mitigation projects in Kedah and Penang as turnkey contractor. Redmax’s track record in completing flood mitigation projects and the fixed price contract arrangements with its experienced subcontractors provide satisfactory mitigation of pre-completion and cost overruns risks. MARC notes, however, that there has been a meaningful weakening in Redmax’s credit profile since 2009 due to operating losses.

Due to earlier delays in the land acquisition process, Redmax had sought JPS’ approval for a 12-month extension of time (EOT) in July 2010, extending the completion date to early May 2013 from early May 2012 as initially scheduled. MARC believes that the EOT will have limited impact on Makro’s ability to service the bonds in accordance with the bond amortisation schedule. Redmax has engaged the services of additional new subcontractors in dredging, land based works and concrete structures to accelerate the progress of the project. In October 2010 and November 2010, Makro achieved overall project progress of 22.91% and 25.09% respectively, exceeding the revised project schedule by 2%. Based on the revised schedule, the project should achieve actual progress of 28.4% by February 2011 and 47.4% by August 2011.
 
Based on aforementioned progress targets, Makro is currently projecting average monthly receipts of RM11.5 million  in FY2011 and  RM10.7 million in FY2012, of  which  around 72% will be applied towards the operating expenses of the project, including payments to subcontractors, suppliers and overheads. Balances in the designated accounts are substantial at RM46.8 million as at December 2, 2010, and provide a cash buffer during periods of lower-than-expected project cash flows. This includes transferring monies into the Finance Service Account and Sinking Fund Account six months prior to each profit payment due dates and principal redemption maturity dates with full amount built up three months before the respective payment and redemption dates. Makro met its profit payment in February 2011 of RM3.8 million and has a principal redemption of RM25.0 million in August 2011. Makro is not subjected to Finance Service Coverage Ratios under the terms of the bonds; nevertheless, MARC assesses Makro’s cash flow resilience to downside scenarios such as a one-year delay in construction progress and increases in operating costs other than subcontractors’ costs as adequate for its current rating level. Base case FSCR is expected to average 2.18 times from 2011 through 2013, with a minimum FSCR of 1.60 times occurring in 2013.

The stable rating outlook reflects MARC’s expectation that subsequent progress on the project will mirror the revised project schedule, allowing actual cash receipts to remain substantially within cash flow projections.

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