MARC has affirmed its AAIS rating on BEWG (M) Sdn Bhd’s (BEWG) RM400 million Sukuk Wakalah with a stable outlook.
BEWG, a 100%-subsidiary of Hong Kong-based Beijing Enterprises Water Group Limited (BEWGL), was set up to undertake water and sewerage projects in Malaysia. In 2015, it was awarded by the Terengganu state government a design-and-build contract to refurbish and upgrade water treatment and distribution facilities in Kemaman, Terengganu (Kemaman water project), for which the Sukuk Wakalah was raised. Upon completion of the project, BEWG will be entitled to six payments from the state government totalling RM686.9 million over five years, commencing within 45 days from issuance of the Certificate of Practical Completion (CPC) (deferred payment period). The Terengganu state government has a sub-sovereign credit rating of AA-/Stable from MARC.
The rating incorporates a rating uplift based on the credit strength of parent BEWGL which has provided an unconditional and irrevocable corporate guarantee on BEWG’s sukuk obligations during the construction stage and extended a letter of undertaking to provide liquidity support during the deferred payment period. BEWGL is 41.1%-owned by Beijing Enterprises Holdings Limited (BEHL), which in turn is linked to the Beijing municipal government; the Beijing municipal government through the Beijing Assets Supervision and Administration Committee has a 62% indirect ownership in BEHL. Both BEWGL and BEHL are listed on the Hong Kong Stock Exchange. BEWGL operates a large portfolio of wastewater and water treatment plants (WTP) in China, mostly for municipal governments in the country under long-term concession arrangements.
The stable rating outlook incorporates the sufficient protection provided to sukukholders during the construction and post-construction phases. It reflects MARC’s expectation that financial support from the shareholder, BEWGL, will remain forthcoming in times of need. Any revision in the rating and/or outlook will hinge on changes in the credit strength of BEWGL and/or the Terengganu state government.
The Kemaman water project has run behind schedule. It was to be completed on December 15, 2019 (Extension of Time No. 1 (EOT1)), but works remain ongoing as at end-June 2020 with progress standing at 97%. The delay is attributed to flooding, triggered by monsoon rains, that had hindered works at Package B2 (rock revetment for new intake at Sungai Kemaman) and at Package A3 (pipe-jacking works at Line E1 – A1).
Before the COVID-19 outbreak and the imposition of the Movement Control Order, BEWG was looking at mid-August 2020 to complete, test and commission, and hand over the project to the Terengganu state government. However, challenges presented by the COVID-19 pandemic - including travel restrictions on foreign technical personnel and disruption in the supply chain - have further affected work progress, with the handover now anticipated to be by end-2020. In this regard, BEWG has applied for EOT2 to December 15, 2020, which is pending approval.
While this will delay the start of payment from the state government by one year to January/February 2021, BEWG’s ability to repay the sukuk’s first RM120 million principal and profit of about RM9 million on July 20, 2020 was not affected. The payments were met through a €27 million (approximately RM122.5 million) cash injection by parent BEWGL on January 13, 2020 and BEWG’s internal funds.
Major Rating Factors
Strengths - BEWGL undertaking for liquidity support;
- Strong counterparty in Terengganu state government; scheduled payment structure to meet financial obligations
Challenge/Risk - Administrative delays in payments from Terengganu state government
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