MARC has assigned the rating of AA-IS to Matang Highway Sdn Bhd’s (Matang) RM70.0 million Sukuk Musharakah (the Sukuk). The outlook for the rating is stable.

Matang is a wholly-owned subsidiary of Zecon Berhad (Zecon), established with a single purpose to undertake the issuance of the Sukuk. The proceeds from the Sukuk will be utilized to refinance Zecon’s existing debts and to finance working capital requirements for the turnkey contract awarded by Jabatan Kerja Raya Sarawak (JKR Sarawak) to Zecon for the design and construction of the route from Kuching City to the proposed new Federal Administrative Centre (FAC) in Rambungan, Sarawak (Matang Route Project). Matang and Zecon will enter a Mudarabah arrangement under which the former will be the capital provider for the turnkey contract and Zecon, as the entrepreneur. Sukukholders will invest in trust assets which comprise Matang’s rights, entitlements, benefits and interest under the turnkey contract, the designated accounts under the proposed issue structure and other permitted investments. Proceeds from the turnkey contract represents the source of debt service for the fully amortising three-year Sukuk.

The rating is supported by the credit quality of the sole obligor, JKR Sarawak, and the moderate construction risk associated with the turnkey contract. JKR Sarawak, a State Department directly responsible to the Sarawak Ministry of Infrastructure Development and Communications, has been making prompt payment under this project that is, within 30 days of the issue of interim certificate. Furthermore, a satisfactory level of regulatory certainty is derived from the Ministry of Finance’s approval of the project. This will ensure that the Federal Government and JKR Sarawak remain committed to their obligations under the project. The rating also reflects the protective covenants under the proposed issue structure and the designated accounts capture construction receipts in respect of the turnkey contract.

Tempering the positives, however, are the non-recourse nature of the financing structure as well as the moderate financial strength of its originator/shareholder, Zecon, which is also the contractor for the Matang Route Project. Zecon’s cash flow position has been tight in the past few years, pressured by high finance costs and initial cash outflow for new construction contracts, including land clearing and bunting. Construction progress on the Original Matang Route (OMR) supports the revised schedule of completion by December 2008 and is 62.59% completed as of 31 December 2007.

The OMR Project, awarded in July 2002, had earlier entailed the construction of a 25 km two-lane dual carriageway at a fixed contract sum of RM314.61 million. In August 2007, project was revised to comprise two phases, OMR and the Revised Matang Route (RMR). The first phase, OMR, which has a fixed contract price of RM201.21 million, is an 18-km route from the proposed new FAC in Rambungan to Taman Matang Jaya. The second phase, RMR meanwhile, is a 13.4-km stretch ending at and connecting to Jalan Stadium, has a fixed contract price of RM124.15 million. With the revision, the combined contract sum has increased to RM325.36 million. The completion date for the OMR has been extended to December 2008 while the RMR is scheduled to be completed in March 2011. Construction progress is progressing according to the revised schedule.

Rating stability is provided by a combination of the obligor’s stable credit outlook and continuing performance of Zecon under the turnkey contract.