View Credit Analysis Report (605389004695)

SubcategoryInfrasturcture & utilities - Others
Date Article2022-04-29 00:00:00
Rating action     
MARC Ratings has affirmed its AA-IS rating on Konsortium KAJV Sdn Bhd’s (KAJV) Sukuk Wakalah Programme of up to RM1.0 billion, with a stable outlook.

The affirmed 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. 

Sukukholders are 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. Receivables collection continues to be smooth; the state government has made the first and second deferred payments of RM108.8 million each on a timely basis. 

As of January 25, 2022, the project is 86.02% completed versus a planned progress of 86.23%. Work is to be completed by the second extension date of September 5, 2022 (Extension of Time (EOT No. 2)) from May 14, 2022 (EOT No. 1). The second EOT was granted by the state government to take into account for the effects of COVID-19-related restrictions. As of end-March 2022, total approved FPCs amounted to RM770.9 million while sukuk issued totalled RM565.0 million.

Meanwhile, as of end-February 2022, KAJV’s liquidity stood at RM186.2 million in cash and cash equivalents, providing sufficient cover on the upcoming sukuk maturity of RM70 million on May 13, 2022.

Rating Outlook     
The stable rating outlook considers the Sukuk Wakalah Programme’s creditor-protective structure against project delay risk, and incorporates our expectation of timely contractual payments from the Terengganu state government.

Rating Trajectory     

Upside scenario     
A positive rating action is unlikely in the short-term, but a positive action on Terengganu’s sub-sovereign rating would prompt a similar action to KAJV’s rating. 

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

Key strengths
Steady cash flows from contract with Terengganu state government
Strong structural protections against construction and completion risks
Strong liquidity position

Key risk
Potential administrative issues delaying payments from Terengganu state government

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