Alpha Circle Sdn Bhd - 2012

MARC has affirmed its AA-ID and AID ratings on Alpha Circle Sdn Bhd’s (Alpha Circle) RM345.0 million Senior Musharakah Medium Term Notes (MMTN) programme and RM35.0 million Junior MMTNs respectively. The ratings carry a stable outlook.

The ratings affirmation incorporates the strong performance of Alpha Circle due to the higher-than-projected issuance of foreign work permits for which fixed periodic payments are received from the Malaysian government under a long-term Public-Private Partnership (PPP) contract, the low operating risks associated with the registration project, the structural features of the financing and the moderate near-term economic growth prospects that would support demand for foreign labour. The ratings are moderated by the susceptibility of foreign worker inflow to government policy and to underlying economic conditions as well as the project’s high leverage. The two-notch rating differential between the junior and senior notes reflects the junior notes’ lower ranking in priority of payment and security.

Alpha Circle is a wholly-owned special purpose company of NERS Sdn Bhd (NERS) that was set up to implement a Public-Private Partnership (PPP) project. The project, a National Enforcement and Registration System (NERS system), captures personal and physiological information on all foreign arrivals and foreign residents in the country and transmits the information to a centralised immigration department. Under the PPP, NERS receives payments from the government on the basis of work permits issued/renewed by the Department of Immigration (RM50 per work permit issued/renewed). The government funds these payments via a foreign worker levy of equal amount. MARC notes the full implementation of the NERS system at all required sites in the country; nonetheless, NERS will continue to implement the system at other identified sites required by the government under the PPP contract. MARC considers the project’s operational risk to be low given the satisfactory support provided by NERS’ key software and hardware suppliers.

MARC observes that since the initial issuance of notes under the MMTN programme in February 2012 until November 2012, the monthly average collection from the government was 13.6% higher than the initial monthly projected collection of RM8.33 million. This has led the project’s cash flow to be stronger than forecast, enabling Alpha Circle to comfortably meet its minimum financial service cover ratio (FSCR) of 1.75 times. The increase in foreign workers since the economic crisis of 2009 has been supported by projects  being  implemented under the Economic Transformation Programme (ETP) as well as continued dependence on low-cost foreign workers in the manufacturing and plantation sectors. Notwithstanding these factors, MARC notes the historically fluctuating trend of foreign worker inflow to be indicative of its susceptibility to domestic economic conditions and government policy on migrant labour and continues to view volume risk as the PPP project’s main risk.

Nonetheless, MARC’s sensitivity analysis reveals that Alpha Circle’s cash flow projections can withstand a large volume reduction of foreign workers before its FSCR is breached, due largely to the requirement under the issue structure to transfer minimum monthly collections of RM3.75 million into the financial service account (FSA) ahead of meeting operating expenses and dividend distributions for the first five years. In addition, upon achieving a pre-agreed milestone under the PPP contract, Alpha Circle would be able to transfer 60% of revenue from the current 45% to the FSA which would provide a buffer against volume declines.

MARC observes that under the current maturity profile of the senior notes issued under the MMTN programme, all outstanding notes are expected to be redeemed by year 2019. The cash balance in FSA and the project account of RM33.60 million and RM4.80 million respectively as at December 11, 2012 indicate that the company is on track to meet its near-term financial obligations of RM40.0 million and RM55.0 million MMTNs maturing in 2013 and 2014 respectively.

The stable outlook for the ratings reflects MARC’s views that the company would be able to comfortably fulfil its operational and financial obligations. The ratings may be upgraded should the issuance of foreign work permits continue to exceed expectations. Conversely, the ratings may come under pressure if the number of work permits processed is considerably below projections.

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