Alpha Circle Sdn Bhd - 2014

MARC has affirmed the ratings of AA-IS and AIS on funding vehicle Alpha Circle Sdn Bhd’s (Alpha Circle) RM540 million Senior Sukuk Musharakah (Senior Sukuk) and RM55 million Junior Sukuk Musharakah (Junior Sukuk) respectively under a Sukuk Musharakah programme. The ratings carry a stable outlook. The two-notch rating differential between the Senior Sukuk and the Junior Sukuk reflects the latter’s subordinated ranking in priority of payment and security.

The affirmed ratings incorporate the improved cash flows of Alpha Circle on the back of an increased volume of foreign work permits issued/renewed under the National Enforcement and Registration System (NERS project). The project was set up by parent NERS Sdn Bhd (NERS) under a 12-year Public-Private Partnership (PPP) agreement. The ratings are underpinned by the assured payment stream of RM50 for each foreign work permit issued/renewed that NERS receives from the Malaysian government.  Since the implementation of the critical phase of the project in 2011, the number of foreign work permits issued/renewed has been above the two million mark, generating higher-than-projected cash flows.

MARC considers the cash build-up mechanism provided in the Sukuk Musharakah programme as an important rating factor to adequately address profit and principal payments. For this purpose, a significant 80% of total payments received from the government for the foreign work permits issued/renewed is captured in the financial service account (FSA). In addition, a minimum of RM5 million per month is routed into the FSA until 2018 which will provide some buffer to volume risk associated with foreign worker inflows. This notwithstanding, the rating agency views the high susceptibility of foreign worker inflows to domestic economic conditions and government labour policies as a key rating constraint. 

Operational risk associated with the registration project, which records data on foreigners in the country and transmits it to a centralised database in Putrajaya, is considered low given the moderate complexity of the project and the technical support and maintenance provided by S5 Systems Sdn Bhd (S5S). MARC notes that S5S has not faced any major hitches during the implementation and operational phases of the project. While NERS is exposed to volume risk as its revenue is entirely dependent on the number of foreign work permits issued/renewed, the continued strong demand for foreign labour will support its financial performance in the near term. According to the Bank Negara 2013 Annual Report, the number of foreign workers stood at 2.47 million at end-2013, which is substantially higher than the base volume needed to meet the project’s cash flow needs.   

For the unaudited financial year ended June 30, 2014 (FY2014), NERS’ revenue improved by 4.7% y-o-y to RM113.9 million but registered a pre-tax loss of RM5.3 million (FY2013: RM8.2 million). The pre-tax loss was largely due to higher depreciation expenses and finance cost incurred during the year. MARC expects the finance cost, which increased to RM28.3 million (FY2013: RM20.4 million) and is forecast to rise further in FY2015 after the full issuance of notes under the rated programme, will weigh on earnings in the medium term. The higher finance cost was due to a refinancing exercise undertaken in November 2013 in which Alpha Circle issued the RM595 million Sukuk Musharakah programme, proceeds from which were largely used to redeem the outstanding RM380 million under the Musharakah Medium Term Notes (MMTN) programme. The MMTN programme was subsequently cancelled.

MARC notes the actual collection from the government registered an increase of 2.8% over initial projections of RM110.8 million in FY2014. The company has complied with its financial service cover ratio (FSCR) of 1.75x during the year. Alpha Circle has redeemed RM60 million Senior Sukuk in mid-November 2014. Under the reduction schedule, the Sukuk Musharakah programme will be reduced by RM30 million and RM35 million in FY2015 and FY2016 respectively.

The stable outlook reflects MARC’s expectations that NERS will be able to sustain its business and financial profiles by meeting its obligations under the terms of the PPP agreement. Downward rating pressure could develop if there is a significant reversal in the volume of foreign worker inflows that could lead to a deterioration in projected cash flows.

Major Rating Factors

Strengths

• Assured payments from the Malaysian government; and
• Key phase of the project fully implemented.

Challenges/Risks

• Project cash flows directly linked to foreign worker inflows which are vulnerable to economic conditions and government policies; and
• Exposure to rollover risk with respect to current issued sukuk maturity profile.