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.

Rationale       

The rating affirmation 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. MARC Ratings has a sub-sovereign credit rating of AA-/Stable on Terengganu. 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.  

On April 28, 2024, the state government had agreed to an eighth extension of the project completion deadline to December 31, 2024 (EOT No. 8). Per EOT No. 7, the project was due to be completed on April 28, 2024, but came behind schedule due to delays in some retrofitting works. As of March 25, 2024, the project was 97.0% completed. 

Notwithstanding the delay, sukukholders are insulated from construction and termination risks by virtue of the following features of the Sukuk Wakalah Programme:  

The rating is underpinned by these strong transaction features. As at date, KAJV has received four deferred payments of RM108.8 million each from the Terengganu state government, all of which were received on time. As of end-March 2024, KAJV had issued a total of RM910.0 million under the Sukuk Wakalah Programme against approved FPCs of RM1.2 billion. Total sukuk outstanding as of May 14, 2024, was RM600.0 million. 

The stable 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.   

A positive rating action on Terengganu’s sub-sovereign rating would be mirrored in KAJV’s rating.  

A negative rating action on Terengganu’s sub-sovereign rating would be reflected in KAJV’s rating. Delays in the scheduled collections from the state government, if they have a material adverse impact on KAJV’s debt-servicing ability, could also lead to a negative rating action.