BEWG (M) SDN BHD - 2017

MARC has assigned a final rating of AA_IS to BEWG (M) Sdn Bhd’s (BEWG) eight-year RM400 million Sukuk Wakalah with a stable outlook.

BEWG is a wholly-owned indirect subsidiary of Hong Kong-based Beijing Enterprises Water Group Limited (BEWGL), which in turn is a subsidiary of Beijing Enterprises Holding Limited (BEHL), a state-owned company involved in water, sewerage and natural gas operations in China. BEWG is undertaking a RM499 million water treatment project in Kemaman, Terengganu, which was awarded by the Terengganu state government.

The preliminary rating benefits from a one-notch rating uplift based on the credit strength of parent BEWGL, the provider of an unconditional and irrevocable corporate guarantee during the construction phase and a letter of undertaking to provide liquidity, if necessary, to meet financial obligations on the sukuk during the post-construction phase. Listed on the Hong Kong Stock Exchange, BEWGL’s strong credit profile is underpinned by its sizeable market position in water-related projects in China. The rating also incorporates the strength of the Terengganu state government, the offtaker of the water treatment project in Kemaman.

Proceeds from the Sukuk Wakalah issuance will be used to fund the refurbishment and upgrading of water treatment and distribution facilities. The project is expected to be completed in November 2018, three years after works commenced in November 2015. MARC views the project to have moderate construction risk which is mitigated by the technical and financial support from BEWGL. The support compensates for BEWG’s limited operating track record in Malaysia, having only undertaken the RM983.0 million Pantai 2 Sewage Treatment Plant (Pantai 2 STP) in Kuala Lumpur in 2015 prior to the Kemaman project. MARC notes that the maiden Pantai 2 STP project was completed on time with no cost overruns.

The rating agency also views the project completion risk to be minimal considering the smaller scale of work for the Kemaman project, which will process a combined 485 million litres per day (MLD) relative to BEWGL’s current water treatment projects in China, which process a combined 4,190 MLD. However, as of February 28, 2017, BEWG completed only 12.5% of works against a planned 32.5%, with the delay attributable to design changes as requested by the Terengganu state government that have since been finalised. The project involves refurbishing and upgrading the water treatment plant in Bukit Sah to its maximum capacity of 255 MLD; constructing a new water intake, pumping station and service reservoirs as well as piping systems for the existing Petronas water treatment plant with a design capacity of 230 MLD. The initial construction cost of RM102.2 million as at early-May 2017 was funded from BEWG’s internal funds and an amount in excess of RM100.0 million of the project cost will be reimbursed to BEWG under the 80:20 sukuk and equity financing mix.

During the construction phase, BEWGL will provide a corporate guarantee to meet any financial obligations under the terms of the sukuk. The overall project is scheduled to be handed over to Terengganu’s state-owned Syarikat Air Terengganu Sdn Bhd (SATU) in November 2018. The state government will make six annual payments to BEWG totalling RM686.9 million over a five-year period, commencing within 45 days from the receipt of Certificate of Practical Completion. The payments will be captured in a collection account as a build-up towards annual profit and principal repayments. MARC draws comfort from the requirement to maintain a minimum balance equivalent to the next six months’ profit and principal payments in the finance service reserve account (FSRA). The first deferred payment of RM129.6 million is more than sufficient to meet BEWG’s first schedule sukuk redemption of RM120.0 million in 2020.

The company’s cash flow projections indicate that BEWG would achieve a minimum and average financial service cover ratio (FSCR) of 2.32 times and 3.46 times respectively during the tenure of the sukuk against the covenanted FSCR of 1.75 times. Based on MARC’s sensitivity analysis, the company’s cash flow can withstand an increase of 10% in construction costs before breaching its covenanted FSCR. While the strength of the payment stream reflects the state government’s ability to meet the scheduled payments, any potential payment delays and cost overruns are addressed by BEWGL’s shareholders’ undertaking. In addition, as dividends to its shareholder and reimbursement to BEWG can only be made if the project FSCR exceeds 2.00 times after such payments are made, the sukuk structure is supportive of a build-up of cash reserves.

The stable rating outlook incorporates the sufficient protection provided to sukukholders during the construction and post-construction phases. Any revision in the rating and/or outlook will hinge on changes in the credit strength of BEWGL and/or Terengganu state government.

Major Rating Factors

Strengths

• Construction risk mitigated by corporate guarantee from creditworthy parent company;
• Sufficient scheduled payments to meet financial obligations; and
• Shareholders’ undertaking by parent company.

Challenges/Risks

• Construction delay; and
• Scheduled payment delay.