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.

ACSB was set up as a funding vehicle to facilitate the subscription of its sister company Peninsular Medical Sdn Bhd’s (PMSB) Redeemable Convertible Preference Shares (RCPS-i). In return, PMSB has assigned to ACSB the availability payments (AP) and maintenance charges (MC) it receives from the government.

The rating affirmation is driven by the credit strength of the government which will make concession payments that are channelled to ACSB’s designated accounts for sukuk repayments. The rating is moderated by concerns that any unexpected increase in maintenance costs would impact cash flow, as well as by the weak credit profile of sponsor-cum-shareholder, Ahmad Zaki Resources Berhad (AZRB) that has provided a guarantee on the issuer’s financial obligations. We note that ACSB’s financial obligations under the rated Sukuk Murabahah are insulated by ACSB’s bankruptcy remote status and by the assignation of AZRB’s shares in PMSB to sukukholders.

ACSB receives AP and MC totalling about RM8.3 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. Funds to meet PMSB’s operating expenditure requirement has been in line with its asset maintenance forecast. The maintenance services for Sultan Ahmad Shah Medical Centre are undertaken by Advance Pact Sdn Bhd, which has a track record of providing services for 22 other government hospitals. We understand that as of date, there has been no breach in obligations under Advance Pact’s maintenance contract with PMSB.

Based on the projected cash flow, ACSB is expected to have sufficient funds to meet its first sukuk principal repayment amounting to RM100 million on December 23, 2022. As at end-March 2022, it has total cash balance of RM162.7 million, of which RM96 million has been deposited in the finance service reserve account (FSRA).

ACSB’s parent, AZRB is an established player mainly in the engineering and construction (E&C) sector. Its ongoing major project, the 36.16-km East Klang Valley Expressway (EKVE) is due for completion in July 2023. We note the majority of group borrowings of RM3.0 billion are related to construction projects and will be paid off upon each respective project’s completion and/or per-project funding arrangement. AZRB has faced challenges to secure new construction contracts since 2019.

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 see downward pressure should there be a delay in 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.