BEWG (M) SDN BHD - 2019

MARC has affirmed its AA_IS rating on BEWG (M) Sdn Bhd’s (BEWG) RM400.0 million Sukuk Wakalah with a stable outlook.

BEWG is wholly-owned by Hong Kong-based Beijing Enterprises Water Group Limited (BEWGL), which in turn is an associate company of Beijing Enterprises Holding Limited, a state-owned entity of the Beijing municipal government. The rating reflects the unconditional and irrevocable corporate guarantee from BEWGL during the construction phase and a letter of undertaking to provide liquidity support during the deferred payment period. BEWGL’s credit profile is underpinned by its large portfolio of wastewater and water-treatment plants in China. The plants are mostly operated on behalf of municipal governments in the country under long-term concession agreements.

The RM499 million water-treatment plant (WTP) project in Kemaman, Terengganu entails the refurbishing and upgrading of existing WTP as well as constructing new water infrastructure. Construction completion stood at 86.6% (planned: 86.2%) as at end-May 2019 against a revised project completion date of December 15, 2019. The extension of time was granted by the Terengganu state government in November 2018 following delays attributed to land acquisitions and weather-related issues. Upon receipt of the certificate of practical completion, the state government will make six payments to BEWG amounting to RM686.9 million over a five-year period. MARC is of the view that the state government is committed to water-related infrastructure projects as reflected by the large allocation of the state’s development expenditure to these projects. The Terengganu state government has a sub-sovereign credit rating of AA-/stable from MARC.

The first payment of about RM129.6 million is expected to be received in December 2019, which would be sufficient to meet its first sukuk redemption of RM120.0 million in July 2020. Profit payment on the sukuk during the construction phase is being met through the company’s internal cash. The profit obligation in 2019 is estimated at RM21.0 million against the company’s cash position of RM143.3 million as at end-December 2018. BEWG’s cash flow projections indicate that the company would achieve minimum and average finance service cover ratios (FSCR) of 2.58x and 3.87x during the tenure of the sukuk. Based on the project cash flow and given the advanced stage of the construction, BEWG can withstand a maximum 75% increase on the remaining construction cost without potentially breaching its covenanted FSCR of 1.75x in 2021.

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 also hinge on changes in the credit strength of BEWGL and/or the Terengganu state government.

Major Rating Factors

Strengths

• Scheduled payment structure to meet financial obligations; and
• Shareholder’s undertaking by parent company.

Challenge/Risk

• Administrative delays in payments from state government.