MARC Ratings 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 its payment obligations due on the Facility Payment Certificates (FPC) it issued for work completed by KAJV for the Kuala Terengganu Utara (KTU) water supply project. Terengganu carries a sub-sovereign credit rating of AA-/Stable from MARC Ratings. The KTU project involves the construction of a 120-million litres per day (MLD) conventional water treatment plant (WTP) and a 28-MLD membrane WTP as well as retrofitting works of existing WTPs, among other related works. 

As of March 25, 2023, the project was 93.5% completed. It was slated to be completed on April 24, 2023, per the extension of time (EOT) No. 3 given, but fell behind schedule due to delays related to retrofitting works. However, on April 19, 2023, the state government approved EOT No. 4 to complete the project by August 2, 2023.   

Sukukholders are, nevertheless, insulated from construction and termination risks by virtue of the following features in the Sukuk Wakalah Programme:  

• Each sukuk issuance is backed by FPCs approved by the state government for works that have been completed. 
• The FPCs represent unconditional and irrevocable payment obligations on the state government, notwithstanding any delay in the full completion or termination of the project. 
• 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.

The rating is underpinned by these strong transaction features. As to date, KAJV has received three deferred payments of RM108.8 million each from the Terengganu state government on schedule.

The stable rating outlook considers the Sukuk Wakalah Programme’s creditor-protective structure against project delay and/or termination risks and incorporates our expectation of timely contractual payments from the Terengganu state government.   

An upgrade of Terengganu’s sub-sovereign rating would lead to an upgrade of KAJV’s rating. 

A negative rating action on Terengganu’s sub-sovereign rating would similarly affect KAJV’s transaction rating. Delays in the scheduled collections from the state government, if they have a significant adverse impact on the ability of KAJV to fulfil its sukuk obligations, could also lead to a negative rating action.