MARC has affirmed Sacofa Sdn Bhd’s (SACOFA) and its special purpose subsidiary, Sarawak Gateway Sdn Bhd’s (Sarawak Gateway) RM160.0 million Sukuk Istisna’ and RM240.0 million Sukuk Ijarah at AAAIS respectively with a negative outlook. The strong ratings reflect, amongst others, majority state-owned Sacofa’s strategic position as sole developer, owner and manager of telecommunication towers (towers) and structures in the State of Sarawak; and, the licensing agreement entered into with creditworthy telecommunication companies (telcos). Nonetheless, downward pressure to the ratings include the deterioration in the company’s cash flow position arising from further delays in the construction of new towers, should it continue to occur.

The negative outlook is attributed to the negative variation in the revenue and cash flow reported as at end August 2006 in comparison to the original projections resulting from amongst others, delays in the site acquisition which led to the reduced number of towers built; and lower take up for the submarine cables. As a result, Sacofa has revised cash flow projections for the remaining tenure of the facilities which was found to be less robust. Nevertheless, the cash flow was still able to withstand MARC’s stress tests and comply with the issue structure’s financial covenant. To mitigate further delays to the construction of the towers, Sacofa has implemented various measures to expedite site acquisition and power supply connectivity. As it is imperative for these measures to be effectively implemented to ensure that delays in the construction of the towers are minimised, MARC takes comfort in the State Financial Secretary of Sarawak’s close monitoring of this business segment.

SACOFA was formed under the SGS’s initiative with the purpose of providing the telecommunication infrastructure and monitoring the growth of telecommunication facilities in the State of Sarawak whereby it was granted a 20-year concession to build and operate telecommunication towers in Sarawak by the SGS in 2002. The agreement entitles SACOFA the exclusive right to erect and maintain telecommunication towers under a build and operate concept, and to lease, rent or grant licenses over such towers.  In June 2005, SACOFA entered into a Master Licensing Agreement (MLA) with the telcos under the Time Two A (T2A) programme and individual license agreement for programmes outside the T2A for a period ranging from five to ten years whereby SACOFA is entrusted to serve appropriate sites, commission the construction of towers and grant the telcos the right to use the towers on a sharing basis.

SACOFA’s major revenue contributors are rental proceeds from the towers which is expected to contribute approximately 60% to the total revenue throughout the remaining tenure of the facilities whilst its other revenue contributors are the leased line customers (comprising of submarine cable and onland fibre optic network). MARC notes that under the revised cash flow projections, the leased line customers are expected to contribute more significantly, ie 40% of the total revenue, following the introduction of the point-to-point product bundling. With the expected increase in contribution from corporate clients under this product strategy, MARC anticipates a riskier offtaker profile, going forward.

Under the issue structure of the Sukuk Istisna’ issued by Sacofa, all payments due from the lease of telecommunication towers and bandwidth from its fibre optic network shall be utilised towards the redemption of the primary and secondary notes.  Similarly, all Ijarah rentals due from Sacofa under Sarawak Gateway’s Sukuk Ijarah have been earmarked for redemption of principal and profit payments.  The priority of payment for the primary and secondary notes of the Sukuk Istisna’ and Sukuk Ijarah rank pari passu. Liquidity risk is substantially mitigated as payments for operating and administrative expenses would only be made after obligations under the proposed facilities, in the respective financial period, are fulfilled. Barring any unforeseen circumstances, the balance in the Telco Revenue Account of RM12.1 million (as at 30 November 2006); the current rental stream as well as the projected rental revenue from the towers from creditworthy telcos; and income from the leaseline providers, MARC expects SACOFA to maintain a healthy liquidity position.