Rating action     
MARC has lowered its ratings on Alpha Circle Sdn Bhd’s RM540 million Senior Sukuk Musharakah and RM55 million Junior Sukuk Musharakah to BB_IS and B_IS. Concurrently, MARC has removed the rating from MARCWatch Negative but maintained the outlook at negative. The current outstanding of senior sukuk is RM140 million and junior sukuk is RM55 million. 

Rationale     

Our rating action highlights the ongoing challenges surrounding the hire of foreign labour that has remained significantly affected by measures implemented to contain the COVID-19 pandemic. Among these are the freeze on new worker intake from abroad as well as operational and administrative disruptions due to movement restrictions, culminating in a low issuance volume of permits for foreign workers and slow payment receipts. As a consequence, Alpha Circle’s cash flow has remained weak. The rating downgrades reflect the heightened concerns on the company’s ability to meet its upcoming senior sukuk repayment of RM55 million in November 2021 as the cash build-up in its finance service account (FSA) would be insufficient. 

We note the foreign worker permit volume was about 1.5 million compared to a forecast of 2.0 million for the 12 months ended June 30, 2021. While this translates to an annual payment of RM75 million, lower than the five-year average of RM100 million p.a., payments from the government have also been slow. As at date, the parent company NERS Sdn Bhd has only received payments amounting to RM12.9 million for the billing period between March and April 2021. MARC understands that NERS is facing a payment backlog for up to 307,338 applications (between May and August 2021), translating into delayed payments of up to RM15 million. Any improvement in issuance volume would depend on the easing of pandemic measures and timely execution of the government’s foreign worker recalibration programme; however, we do not expect sufficient recovery in the coming months.

As at end-July 2021, funds in the FSA stood at RM12 million. Alpha Circle is the funding vehicle of NERS. From January to August 2021, NERS recorded a total of 765,000 foreign worker permit issuances. Based on the assumption of an average monthly foreign worker issuance of 94,000, the FSA is projected to have RM30 million by November 2021. This would translate to a shortfall amount of about RM25 million for its next notes maturing in mid-November 2021. We understand from the management that the company is pursuing a plan to rollover a portion of principal repayments to a later date which will require a waiver of compliance to the sukuk’s existing programme amortisation schedule. Based on the projected financials for financial year ended 2021 (FY2021), Alpha Circle’s finance service cover ratio (FSCR) would stand at 1.43x, lower than the covenanted 1.75x. 

Rating outlook