Rating action              

MARC Ratings 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. The outstanding under the programme is RM435 million as at end-October 2023.

Rationale   

ACSB is a funding vehicle for Ahmad Zaki Resources Berhad (AZRB) to facilitate the subscription of Redeemable Convertible Preference Shares (RCPS-i) of related company Peninsular Medical Sdn Bhd (PMSB). In return, PMSB has assigned to ACSB the availability payments (AP) and maintenance services charges (MC) it receives from the government.

The rating affirmation considers the credit strength of the government as the sole paymaster of the concession and the funds flow structure of the sukuk that ensures all payments from the government are first channelled to ACSB’s designated accounts. The rating considers ACSB’s bankruptcy remote status to insulate financial obligations under the rated Sukuk Murabahah and the assignation of AZRB’s shares and RCPS-i in PMSB, and all loan agreements related to the sukuk structure to the sukukholders.

ACSB receives AP and MC receipts of about RM9.2 million per month for designing, building, and maintaining the 300-bed teaching hospital (Sultan Ahmad Shah Medical Centre) for the International Islamic University of Malaysia (IIUM) in Kuantan. The maintenance services for the hospital are undertaken by Advance Pact Sdn Bhd, which has a track record of providing services for 22 other government hospitals under a long-term contract with the government. MARC Ratings understands that as of date, there has been no material breach in obligations under Advance Pact’s maintenance contract with PMSB.

ACSB’s parent, AZRB, is largely involved in the engineering and construction (E&C) sector. Its ongoing major project — the 36.16-km East Klang Valley Expressway (EKVE) — is expected to be completed in December 2025. The project was initially slated to be completed in September 2019. Total borrowings of RM3.0 billion are mostly undertaken for various construction projects and will be paid off upon the respective project’s completion and/or according to each project’s funding arrangement. AZRB continues to face challenges in replenishing its construction order book which stood at RM967.0 million as at end-June 2023; earnings pressure remains over the near term. The rating remains moderated by the weak credit profile of sponsor-cum-shareholder AZRB, that has provided a guarantee on the issuer’s financial obligations, as well as concerns on any unexpected increase in maintenance costs that would impact cash flow buffer for debt servicing.

The stable outlook reflects our expectation that there will be 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 experience downward pressure should there be a delay in receipts of concession receivables and/or the company fails to meet its maintenance obligations, leading to penalty deductions which could affect the quantum of the project cash flow.