Senari Synergy Sdn Bhd - 2011

MARC has assigned the AAAIS(fg) rating to Sukuk issued under a RM380 million Islamic Medium Term Notes (IMTN) Programme by Senari Synergy Sdn Bhd (Senari Synergy). The outlook on the rating is stable. The rating and rating outlook reflect MARC's credit rating of AAA/stable on Danajamin Nasional Berhad (Danajamin) which is providing an unconditional and irrevocable guarantee to meet obligations on the Sukuk. 

Incorporated in July 2010 to facilitate the streamlining of businesses under Assar Senari Group (ASG), which is indirectly owned by the State Government of Sarawak, Senari Synergy is the current holding company of eight operating subsidiaries. The operations of the eight subsidiaries are concentrated around two projects, the Assar Senari Industrial Complex I (ASIC I) and Assar Senari Industrial Complex II (ASIC II). ASIC II, which replicates ASIC I, is also comprised of an oil terminal, port facilities and a proposed palm oil refinery. Revenue from six of the eight operating subsidiaries provide support for the Sukuk's debt service requirements, which MARC views as a positive credit feature.

The Sukuk proceeds will be mainly used to repay bridge financing and part finance capital expenditure in respect of ASIC I and ASIC II amounting in total to RM194 million, as well as to repay RM139 million of its subsidiaries' debt. The initial issuance of notes under the 20-year programme is expected to have maturities of not more than seven years. MARC's analysis of business risks and sustainable cash flows from ASIC I and ASIC II leads the rating agency to conclude that Senari Synergy would face increased risk of debt service shortfalls and non-compliance with its finance service coverage ratio (FSCR) covenant in the event debt amortisation requirements for the Sukuk exceed RM25.0 million annually. The group's cash flow generation profile, assuming actual operating cash flows do not deviate significantly from the forecast average of RM36.6 million annually, would be more supportive of a level debt amortisation schedule over a tenure that matches the debt programme. A more lumpy debt repayment profile would result in increased refinancing risk and potential violation of its covenant to maintain a minimum FSCR of 1.3 times at all times.

Over 80% of revenues that will be available for debt service are expected to come from the group's independent oil terminal (IOT) which is  adjacent to Senari Port in  Kuching, its centralised oil distribution terminal (CODT) in Tanjung Manis, Mukah and port operations at Senari. The stability of cash flows from IOT and CODT operations are underpinned by 30-year user agreements with PETRONAS Dagangan Berhad (PDB) and Shell Timur Sdn Bhd (STSB) expiring in 2037 and 30 years post-commercial operation of the CODT. PDB and STSB have shareholdings of 20% each in Assar Chemicals Dua Sdn Bhd, the owner and operator of the CODT. The CODT will facilitate the distribution of PDB and STSB’s petroleum products to the Sarawak state’s central region, including Sibu, Sarikei and Mukah. The CODT is currently in the pre-commissioning phase, with commercial operations targeted to commence by end-2011. The group's favourable track record of operating the IOT and palm oil refinery complex in ASIC I since 2007 mitigates concern over potential operational risks in respect of the CODT and proposed palm oil refinery plant at ASIC II. While Assar Senari Port Sdn Bhd (ASPSB) is expected to be the third largest revenue contributor to the group, its contribution to bottom line results and cash flow for debt service is expected to be much more muted based on its historical financial performance. ASPSB had been reporting recurring losses with the exception of its RM17.6 million pre-tax profit for the 12 months ended December 2010 (FY2010); its FY2010 results had been achieved with a waiver of debt owed to the non-core companies of ASG.

MARC believes that the stand-alone credit profile of the Senari Synergy will be largely driven by the business prospects of ASIC I and ASIC II, which are closely tied to the oil and gas sector, as well as the indirect support from its shareholders. Such support will likely be dependent on the significance of ASIC I and ASIC II to the local economy, particularly in relation to employment generation and contribution to economic development. Sukukholders are, nevertheless, insulated from downside risks relating to Senari Synergy's credit profile.

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