CREDIT ANALYSIS REPORT

KONSORTIUM KAJV SDN BHD - 2020

Report ID 605276 Popularity 250 views 16 downloads 
Report Date Oct 2020 Product  
Company / Issuer Konsortium KAJV Sdn Bhd Sector Infrastructure & Utilities - Utilities
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Rationale
MARC has affirmed its AA-IS rating on Konsortium KAJV Sdn Bhd’s (KAJV) RM1.0 billion Sukuk Wakalah Programme with a stable outlook. The rating reflects the credit strength of the Terengganu State Government to meet the unconditional and irrevocable payment obligations on the Facility Payment Certificates (FPC) issued for work done under the Kuala Terengganu Utara (KTU) water supply project. MARC maintains a sub-sovereign credit rating of AA-/Stable on Terengganu, premised on the state’s general creditworthiness underpinned by oil royalty payments and the expectation of continued economic and financial support from the federal government. The stable outlook incorporates the sufficient protection provided to sukukholders through the financing structure throughout the tenure of the sukuk.

KAJV is a single-purpose company owned by Serba Dinamik Sdn Bhd (Serba Dinamik)(40%), FASK Holding Sdn Bhd (FASK)(35%) and Mirmas Holding Sdn Bhd (Mirmas)(25%). KAJV was awarded a design-and-build contract to construct a 120-million litres per day (MLD) conventional water treatment plant (WTP) and a 28-MLD membrane WTP under a deferred payment scheme. The assignment also includes retrofitting, refurbishing and rehabilitating five existing WTPs in Kuala Terengganu. 

The project was originally scheduled to be completed on May 14, 2020. However, on March 26, 2020, KAJV received an extension of time (EOT) to May 14, 2022 following late commencement of pipeline works from Loji Kepong 2 to Tangki Miel and Gondang. This was partly due to a delay from the state government in mandating the works and the process in getting approval from Jabatan Kerja Raya to access relevant roads for the pipe-laying works. However, the EOT will not undermine the sukuk repayment. The sukuk is structured in a way that protects sukukholders from construction delay risk. Each tranche of sukuk issued or to be issued is/will be backed by FPCs approved by the state government for works that have been completed. The FPCs represent unconditional and irrevocable obligations on the state government to pay the approved sum on stipulated payment dates notwithstanding any delay in the full completion or cancellation of the project should there be a breach of the contract by either party. Additionally, there is no right of set-off against any amounts that KAJV may be owing the state government including liquidated ascertained damages (LAD), if any. Overall, MARC views that the project’s construction risk is fully mitigated by the financing structure. As construction is undertaken on a fixed-price contract of RM797.1 million, the contractors, namely Serba Dinamik, Salcon Engineering Berhad and Mirmas, bear the cost overrun risks.

Based on the Work Programme Revision No. 4 (with completion date of May 14, 2022), construction progress stood at 59.5% as at May 2020. As of August 2020, the state government has approved RM350.9 million worth of FPCs while total sukuk issued totalled RM185.0 million. The first deferred payment of RM108.8 million shall be paid by the state government in 12 monthly instalments starting from June 2020 to May 2021; the state government has already made its first four payments up to September 2020.

Major Rating Factors

Strengths 
  • Strong counterparty in Terengganu State Government; and   
  • Favourable sukuk issuance structure that addresses construction and completion risks.
Challenge/Risk
  • Significant reliance on oil royalty payments to fund state financial obligations.

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