MARC Ratings has affirmed BEWG (M) Sdn Bhd’s (BEWG) RM400 million Sukuk Wakalah rating at AA_IS 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 November 2015, it won the Terengganu state government’s contract to refurbish and upgrade water treatment and distribution facilities in Kemaman, Terengganu (Kemaman water project), for which the Sukuk Wakalah was raised. As of February 22, 2023, the outstanding sukuk stood at RM110 million.

The Kemaman water project was formally completed on August 9, 2021, and BEWG received its Certificate of Practical Completion (CPC) from the Terengganu state government on November 24, 2021. Under the deferred-payment contract with the state government, BEWG was to receive six annual payments from the latter over 2021-2026. However, the payments have all been fully settled by the state government by August 29, 2022. 

  

The rating benefits from a one-notch rating uplift on the credit strength of BEWGL who has given its unconditional and irrevocable corporate guarantee (during construction stage) and a letter of undertaking to provide liquidity support to BEWG post-completion. We believe the financial support from BEWGL will continue to be forthcoming, if required, as has been demonstrated in the past. BEWGL has a solid financial profile and a large liquidity buffer (with cash and cash equivalents of around HK$15.0 billion or approximately RM8.4 billion as at end-June 2022), which should provide it with the financial flexibility to extend financial support to subsidiaries, if necessary. 

Meanwhile, BEWG’s liquidity profile is strong. As at date, the company has around RM285.0 million in cash and cash equivalents, supported by the state government’s early payments. As for the next financial commitment of RM83.8 million due on July 19, 2023 (RM80.0 million principal and RM3.8 million profit on the sukuk), the amount has been set aside in the Finance Service Reserve Account (FSRA) as of January 31, 2023, pursuant to the terms of the Sukuk Wakalah. 

The stable rating outlook considers BEWG’s sound liquidity profile, as well as the financial commitment of shareholder BEWGL – by way of a letter of undertaking – to BEWG. 

An upward rating action is unlikely in the near term but could be led by considerable improvement in the credit strength of BEWGL.

Downside pressure could arise from significant deterioration in the credit strength of BEWGL.