MARC has affirmed its AA-_IS rating on AZRB Capital Sdn Bhd’s (ACSB) issuance of RM535.0 million Islamic Medium-Term Notes (Sukuk Murabahah) with a stable outlook.

ACSB was set up for the sole purpose of subscribing to the Redeemable Convertible Preference Shares (RCPS-i) issued by sister company, Peninsular Medical Sdn Bhd (PMSB) from utilising proceeds from the Sukuk Murabahah issuance. In return, PMSB has assigned to ACSB the availability payments (AP) and maintenance charges (MC) it receives from the government under a concession agreement (CA) for designing, building and maintaining the 300-bed teaching hospital for the International Islamic University of Malaysia (IIUM) in Kuantan. The CA expires in 2038, later than the maturity of the sukuk in 2031. The teaching hospital (IIUM Medical Centre) has been operational since 2016. Both ACSB and PMSB are wholly-owned subsidiaries of Ahmad Zaki Resources Berhad (AZRB).

The affirmed rating considers the credit strength of the government to make good the AP and MC which are channelled to ACSB’s designated accounts to meet the sukuk payment obligations. Key moderating factors are the potential for unbudgeted increases in maintenance costs that could affect cash flow as well as the weak credit profile of sponsor-cum-shareholder, AZRB which has provided a guarantee on the issuer’s financial obligations. This notwithstanding, ACSB’s receipts and financial obligations under the rated Sukuk Murabahah are insulated from risks associated with parent AZRB given ACSB’s bankruptcy remote status and by the assignation of AZRB’s shares in PMSB to sukukholders. PMSB has no other financial obligations save for those under the AZRB-subscribed RCPS-i.

PMSB receives monthly AP and MC of about RM5.8 million and RM2.5 million. The monthly transfer of funds for PMSB’s opex requirement from ACSB has also been in line with the asset maintenance forecast. The first principal repayment of the sukuk amounting to RM100.0 million falls due in December 2022. As at end-June 2021, the balance in ACSB’s Finance Service Reserve Account (FSRA) stood at about RM95.6 million.

In respect of the maintenance services for IIUM Medical Centre, these are undertaken by Advance Pact Sdn Bhd, a provider of such services for 22 other government hospitals domestically and other hospitals in the Middle East region. PMSB has a back-to-back arrangement with Advance Pact in which any deduction in maintenance fees from IIUM will be passed on to Advance Pact. We understand that there has been no breach in Advance Pact’s obligations at IIUM Medical Centre to date. 

AZRB has an established track record in the engineering and construction (E&C) sector and has expanded to the property, concession, plantation, as well as oil and gas sectors. However, the group has faced challenges in securing new construction contracts since 2019. AZRB’s ongoing major project, the 36.16-km East Klang Valley Expressway (EKVE), is undertaken by its wholly-owned subsidiary EKVE Sdn Bhd, the concessionaire of the expressway. Completion is expected by January 2022 with a total estimated construction cost of RM1.55 billion. Due to the project’s debts, AZRB’s borrowings remained high at RM3.0 billion as at end-FY2021 against its total equity of RM295.6 million. We note that the bulk of these borrowings are related to construction projects and will be paid off upon each respective project completion and/or per-project funding arrangement.

The stable outlook reflects our expectation that there is no disruption to ACSB’s receipt of concession receivables to meet its contractual obligations. 

We do not foresee any upside to the rating of this sukuk in the near term.

The rating and/or outlook could see downward pressure should there be a delay in concession receivables and/or the company fails to meet its maintenance obligation, leading to deductions which could affect the quantum of the project cash flow.