ALPHA CIRCLE SDN BHD - 2015

MARC has affirmed the ratings of AA-_IS and A_IS on Alpha Circle Sdn Bhd’s (Alpha Circle) RM540 million Senior Sukuk Musharakah (Senior Sukuk) and RM55 million Junior Sukuk Musharakah (Junior Sukuk) with 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 Alpha Circle’s steady cash flows from an assured payment stream from the Malaysian government for undertaking the registration of foreigners and the issuance/renewal of work permits. The rating is supported by the broadly stable volume of work permits issued/renewed under the National Enforcement and Registration System (NERS project). Factors moderating the ratings include the volume risk in respect of foreign worker inflows and the weakened balance sheet of parent and project sponsor NERS Sdn Bhd. MARC continues to regard foreign worker inflows as highly susceptible to economic conditions and government labour policies.

Alpha Circle is a wholly-owned funding vehicle of NERS which has a 12-year concession agreement beginning from July 2011 to undertake the registration of foreigners and, in return, be paid RM50 by the Malaysian government for each foreign work permit issued/renewed. Since the implementation of the NERS project in June 2011, operations have proceeded without any major hitches; operational risk is deemed moderate given the relatively straightforward function of recording the biometric data of foreigners and transmitting the same to a centralised database in Putrajaya. Technical support and maintenance are provided by S5 Systems Sdn Bhd (S5S).

MARC considers the cash build-up mechanism under the Sukuk Musharakah programme as a key rating factor to address timely profit and principal payments under the programme reduction schedule: 80% of the total payments received from the government is captured in the Finance Service Account (FSA) while the remaining 20% is deposited into the Operations Account (OA). MARC notes that the number of foreign workers registered during the financial year ended June 30, 2015 was slightly lower at 2.27 million from 2.32 million in the previous corresponding period; nonetheless, this is within cash flow projections. The lower figure was due to reduced new work permits issued to legalised workers under the now-concluded 6P programme (registration and legalisation) which was introduced in 2011. For FY2015, MARC notes the actual payment collection of RM112.2 million from the Malaysian government remains in line with projections, enabling compliance with the financial service cover ratio (FSCR) requirement. The FSCR was 3.58x in FY2015, against the minimum covenanted FSCR of 1.75x.

For FY2015, NERS’ revenue and operating profit declined marginally year-on-year to RM112.2 million and RM28.2 million respectively. However, its pre-tax profit declined to negative RM5.5 million mainly due to a sharp increase in finance costs to RM31.7 million in FY2014 (FY2013: RM27.2 million). Finance costs rose following the issuance of the RM595 million rated programme, proceeds of which were largely used to early redeem the outstanding RM380 million under the Musharakah Medium-Term Notes (MMTN) Programme.

As at end-November 2015, outstanding senior sukuk stood at RM470 million, compared to the programme’s available limit of RM530 million. Alpha Circle’s debt-to-equity (DE) ratio stood at about 89:11 at end-FY2015. The gradual reduction in programme limit will continue to be supportive of the company’s adherence to the covenanted DE ratio of 90:10. The senior programme limit will be reduced by another RM50 million in November 2016 to RM425 million. However, given that Alpha Circle has a sizeable RM150 million notes maturing in November 2016, it would be exposed to rollover risk.

The stable outlook reflects MARC’s expectations that Alpha Circle will be able to sustain its business and financial profiles by meeting its obligations under the terms of the Public-Private Partnership 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

• Stable renewal of foreign worker permits; and
• Assured payment stream from the Malaysian government.

Challenges/Risks

• Project cash flows remain vulnerable to economic conditions and government policies; and
• Exposure to rollover risk with respect to current issued sukuk maturity profile.