ALPHA CIRCLE SDN BHD - 2018

MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s RM540 million Senior Sukuk Musharakah and RM55 million Junior Sukuk Musharakah at AA-_IS and A_IS. The ratings outlook remains negative.

The affirmed ratings primarily consider the improvement in the volume of work permits issued for foreign workers with the uptrend reflecting moderate success of the government programme to rehire/legalise illegal foreign workers that ended in June 2018. The programme has resulted in about 450,000 illegal workers granted “approved-to-work” status with work permits being issued in batches upon processing. Between March 2018 and February 2019, work permit issuance volume stood at 2.23 million, a 15% increase from the 1.94 million registered during Alpha Circle’s financial year ended June 30, 2018 (FY2018).

Alpha Circle is the funding vehicle of NERS Sdn Bhd which has a 12-year Public-Private Partnership (PPP) contract ending in 2023 to undertake the registration of foreigners in Malaysia. For its service, NERS receives RM50 for every work permit issued to/renewed by a foreign worker. This assured payment from the government is captured under designated accounts to meet the financial obligations under the rated sukuk programmes. MARC views the uptick of new work permits issued by Jabatan Imigresen Malaysia (JIM) under the rehire/legalise programme coupled with annual renewals of existing work permits to signal potential improvement in Alpha Circle’s cash flow buffer, which had been affected in recent years due to a decline in the volume of work permits issued following frequent government policy changes on the hiring of foreign workers.

The negative outlook continues to reflect MARC’s concern that any changes to the existing foreign labour hiring policy could impact Alpha Circle while a slower economic growth forecast of 4.6% (2018: 4.7%) could potentially reverse the recent improvement in foreign workforce. The ratings outlook could be revised to stable if there is improved clarity on government policy on foreign labour and if the current trend on work permit issuances sustains over the next few quarters.

MARC also notes that under an undertaking provided by Alpha Circle’s shareholders, funds had been injected into the project finance service account (FSA) to ensure the covenanted financial service cover ratio (FSCR) was met for FY2018. The undertaking through top-up cash deposits into the FSA will remain throughout the tenure of the sukuk programme to ensure RM85.0 million, which is equivalent to an annual issuance of 2.125 million work permits, is in the FSA. For FY2018, the cash injection from the shareholders MARC Analysis Alpha Circle Sdn Bhd 2 of RM5.1 million was made by end-October 2018. In addition to the volume-based top-up mechanism, the shareholders have also undertaken to make an additional one-off cash injection totalling RM5.0 million into the FSA by end-June 2019.

For FY2018, NERS recorded work permit issuance of 1.94 million. This led to a slight increase in revenue and operating profit to RM94.8 million (FY2017: RM92.3 million) and RM19.3 million (FY2017: RM17.8 million). The RM50 received per work permit issued/renewed is apportioned on an 80:20 basis into the FSA and operating account.

MARC highlights that Alpha Circle will face refinancing risk as RM110 million sukuk of the RM180 million sukuk maturing in November 2019 are expected to be refinanced through issuance of sukuk under the programme. Upon issuance, the sukuk are expected to have a maturity profile that is in line with the programme’s annual limit reduction schedule to avert refinancing risk going forward.

Major Rating Factors

Strength

• Assured payment stream from the Malaysian government.

Challenges/Risks

• Highly susceptible to government policy on foreign worker hire; and
• Rollover risk with respect to current issued sukuk maturity profile.