MARC has placed its AA-IS, MARC-1ID / AA-ID, AA-ID and MARC-1ID / AA-ID ratings on WCT Berhad’s (WCT) RM300 million Redeemable Sukuk with Warrants, RM300 million Islamic Commercial Papers / Medium Term Notes, RM100 million Islamic Fixed Rate Serial Bonds and RM100 million Islamic Commercial Papers / Medium Term Notes Programmes respectively on MARCWatch Negative. The rating action follows Dubai-based developer Meydan LLC’s announcement to cancel an AED4.6 billion (RM4.6 billion) Nad Al-Sheba Racecourse contract on the basis of alleged breach in the form of non-adherence to the agreed construction schedule. Meydan LLC has also called on the performance and advance payment bonds.
 
The Nad Al-Sheba Racecourse contract had been awarded to the 50:50 joint venture (JV) between WCT and Arabtec Construction LLC. The contract for the development of a state-of-the-art racetrack, grandstands and supporting infrastructure including a five-star hotel was to have been completed within a period of 754 days, with completion scheduled for October 2009. To-date, the JV has completed 55% of the physical portion of the works. Of the remaining balance works of 45%, only 5% was to be completed by the JV while the rest was to be undertaken by nominated sub-contractors. WCT has alleged design changes and late instruction as the cause of the delay and has sought an extension which has been denied.

The MARCWatch placement reflects concern that the foregoing developments could cause WCT’s credit protection measures to deteriorate to levels that are no longer consistent with its current ratings. MARC is also concerned that the turn of events will likely result in increased reputational risk that could affect WCT’s standing as a contractor in the Middle East in light of the heavy concentration of ongoing construction projects in the region. At present, the region accounts for 41% of its total order book. Additionally, increasingly challenging industry and economic conditions may affect WCT’s ability to replenish its order book and future order flow.

The cancellation of the contract will reduce WCT’s outstanding order book by 34% to RM2.5 billion and result in a potential loss of RM303 million, made up of RM178 million in performance and advanced payment bonds, RM50 million in demobilisation costs and RM75 million of unpaid works. Of the RM500 million of unpaid works, only RM150 million are accruing to the JV while the balance are due to the nominated subcontractors on a back-to-back basis. The potential loss would result in WCT’s gross gearing deteriorating to 1.03 times from 0.80 times as at end of September 2008. Nonetheless, the company would still be in a position to maintain compliance with its maximum gearing covenant of 1.75 times.

Meanwhile, WCT’s cash and cash equivalents which stood at RM637 million should provide a buffer against the cash impact of this cancellation. Its short-term debt stood at RM262 million as at end of September 2008. WCT’s next scheduled reduction in the bonds of RM30 million are due in 2010.

MARC expects to resolve the MARCWatch placement over the next two to three months once the impact of the cancellation on WCT’s credit profile becomes clearer. The ratings could be lowered in the event of significant deterioration in its credit metrics.

Contacts:
Khairul Muzamel Perera 03-2090 2247/ kevinkhairul@marc.com.my;
Francis Xaviour Joe 03-2090 2279/ fxjoe@marc.com.my