ALPHA CIRCLE SDN BHD - 2017

MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s (Alpha Circle) RM540 million Senior Sukuk Musharakah (Senior Sukuk) and RM55 million Junior Sukuk Musharakah (Junior Sukuk) at AA-_IS and A_IS respectively. The two-notch rating differential reflects the subordination of the Junior Sukuk to the Senior Sukuk in terms of payment and security. The rating outlook has been revised from stable to negative.

Alpha Circle is the funding vehicle for NERS Sdn Bhd, which holds a 12-year Public-Private Partnership contract ending in 2023, to undertake the registration of foreigners in the country. For its service, NERS receives an assured payment stream linked to the volume of registered foreign workers in the country. NERS receives a RM50.0 payment for each foreign worker permit issued/renewed. The ratings affirmation factors in the certainty of payments from the government as well as the financing structure that prioritise deposits into the programme’s finance reserve account (FSA). Under the programme structure, payments from the government bifurcate into the FSA and the Operations Account on an 80:20 basis.

The negative outlook reflects MARC’s increasing concern on the impact of the changes in government policy on the hire of foreign workers in the country. The volume of foreign workers has declined following a recent increase in foreign worker levy coupled with a temporary ban between February and June 2016 on new hires to facilitate a rehiring programme of existing illegal foreign workers in the country. As a result, NERS recorded lower permit issuance/renewals of 1.95 million in 2016, and subsequently 1.25 million during the eight months ended August 2017 (8M2017) (2017 annualised: 1.88 million), as compared to above 2.0 million between 2012 and 2015. Nonetheless, the legalisation of illegal foreign workers, which will end on December 31, 2017, and new application for work permits are expected to improve the foreign worker volume to above 2.0 million by end-2018.

For year ended June 30, 2017 (FY2017), NERS’ revenue was lower at RM92.3 million in line with the lower work permit issuance volume (FY2016: RM98.8 million). Against higher sukuk repayment of RM50 million in FY2017, the project’s cash flow provided a lower y-o-y financial service buffer (FSCR) of 1.76 times based on Alpha Circle’s FY2017 unaudited management accounts (FY2016: 1.82 times). Following a repayment of RM60 million in mid-November 2017, the programme has reduced its limit to RM420.0 million. Given that the reduction limit increases steadily over the next few years, from RM65 million in November 2018 to RM85 million in November 2022, Alpha Circle would require a minimum of about 2.1 million foreign worker permits annually to meet the covenanted FSCR of 1.75 times throughout the remaining tenure of the PPP agreement.

This cash flow projections include a shareholders’ advances of RM10.0 million to be injected into the project cashflows by end-June 2018. In addition to the one-off advance, NERS’ shareholders will undertake to make up for any shortfall should the annual amount received by the project FSA falls below RM85 million annually due to lower volume of foreign worker permit issuances. As at end-November 2017, the outstanding Senior and Junior Sukuk were RM365.0 million and RM55.0 million respectively.

Alpha Circle’s ratings and its outlook will hinge on the recovery in volume of foreign work permit issuance over the near term. The ratings would be downgraded if this volume shows no sign of improving from current level and/or if government policy on foreign labour further impacts the hiring of foreign workers domestically.

Major Rating Factors

Strengths

• Assured payment stream from the Malaysian government.

Challenges/Risks

• High susceptibility to government policy on hiring of foreign workers; and
• Rollover risk with respect to current issued sukuk maturity profile.