CREDIT ANALYSIS REPORT

KONSORTIUM KAJV SDN BHD - 2021

Report ID 605389050 Popularity 47 views 10 downloads 
Report Date Sep 2021 Product  
Company / Issuer Konsortium KAJV Sdn Bhd Sector Infrastructure & Utilities - Utilities
Price (RM)
Normal: RM500.00        
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Rationale
Rating action     
MARC 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) issued for work done by KAJV for the Kuala Terengganu Utara (KTU) water supply project, which involves the construction of a 120 million litres per day (MLD) conventional water treatment plant (WTP) and a 28-MLD membrane WTP. MARC maintains a sub-sovereign credit rating of AA-/Stable on Terengganu, premised on the state’s general creditworthiness underpinned by oil royalty payments and the expected continued economic and financial support from the federal government.

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

  • Each issuance of sukuk is backed by FPCs approved by the state government for works that have been completed; 
  • The FPCs represent unconditional and irrevocable obligations on the state government to pay the approved sum on stipulated payment dates notwithstanding any delay in the full completion or termination of the project due to a breach by either party of the contract; and 
  • 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. 
KAJV is a joint venture between Serba Dinamik Sdn Bhd (Serba Dinamik) (40%), FASK Holding Sdn Bhd (FASK) (35%) and Mirmas Holding Sdn Bhd (Mirmas) (25%). Serba Dinamik Group Berhad’s recent announcement of a special independent review to resolve certain audit issues pertaining to the group’s annual accounts for financial year ending December 31, 2020, could pose some operational and financial challenges to its subsidiary. As Serba Dinamik is a shareholder-cum-contractor for the KTU project, these issues could also affect project progress. KAJV’s rating is, however, driven by the sukuk issuance structure as described above, and is aligned with the credit strength of the Terengganu state government. KAJV’s ability to service the sukuk will ultimately depend on the state government satisfying its payment obligations to the issuer under the transaction structure. 

We note that the state government has granted KAJV an extension of time (EOT) for the completion of the project to May 14, 2022, from May 14, 2020. This EOT considers in part the late approval from Jabatan Kerja Raya for a road access causing a delay in the commencement of pipeline works from Loji Kepong 2 to Tangki Miel and Gondang. The EOT, however, will not undermine the sukuk repayment. Based on Work Programme Revision No. 4 (with completion date of May 14, 2022), construction progress stood at 79.7% as at July 2021, about six percentage point behind schedule. As of August 2021, the state government has approved a sum of RM846.0 million in FPCs while total sukuk issued totalled RM330.0 million. The first and second deferred payments totalling RM108.8 million each from the state government have also been received in a timely manner. 

Rating outlook     
The stable outlook incorporates the sufficient protection provided to sukukholders through the financing structure throughout the tenure of the sukuk.

Rating trajectory

Upside scenario     
An upgrade of MARC’s view on Terengganu’s credit would lead to a corresponding rating action on KAJV.

Downside scenario     
Changes to Terengganu’s sub-sovereign rating could have an impact on KAJV’s transaction rating. The rating may also be sensitive to the timing of deferred payment receipts. Delays in receiving payments, if they result in a materially negative impact on KAJV’s ability to fulfil its sukuk obligations, could lead to a negative rating action.

Key strengths
  • Counterparty risk of the Terengganu State Government
  • Favourable sukuk issuance structure that addresses construction and completion risks
Key risk
  • Significant reliance on oil royalty payments to fund state financial obligations
 

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