MARC has affirmed the ratings of Valid Ventures Berhad’s (VVB) RM510.0 million fixed rate serial bonds (bonds) and up to RM85.0 million Commercial Paper/Medium Term Notes (CP/MTN) Programme at AAA and MARC-1/AAA, respectively. The rating outlook remains stable. The affirmed ratings and ratings outlook continue to reflect the Government of Malaysia’s (GOM) demonstrated willingness and capacity to support the deferred payment obligations of Port Klang Authority (PKA) to VVB, which funds the debt service requirements pertaining to the rated facilities. The government has, through the Ministry of Transport, provided a letter of support for the bonds and CP/MTN, and subsequently provided a soft loan of up to RM4.63 billion to PKA in meeting its debt servicing obligations. The rating also incorporates, among others, a protective issue structure which provides for a six-month debt service reserve.

VVB, a special purpose entity which is wholly-owned by Kuala Dimensi Sdn Bhd (KDSB), was incorporated for the sole purpose of issuing the bonds and CP/MTN to finance the additional development works within the Port Klang Free Zone (PKFZ). The development work comprises junction improvements, electrical infrastructure works and construction of a business class hotel with total contract cost estimated at RM510.38 million excluding variation order. KDSB was appointed by PKA as the turnkey developer to design, construct, finance and complete the development of PKFZ. As at November 2007, the total amount utilised for financing the additional development works was RM446.46 million which include net CP proceeds of RM28.88 million drawn down to fund variation orders. The actual physical works have been fully completed by KDSB with no cost overruns and is currently pending certification from PKA. With the completion of the works, construction risk has been largely eliminated.

Payment from PKA is on a deferred basis, scheduled annually in July and amounts to RM150.0 million from 2007 through 2009, RM120.0 million in 2010 with the final payment in 2011 of approximately RM156.49 million. The final payment which is variable in nature takes into account, among others, interest accrued on balance payable to KDSB at 7.5% per annum. Under the bonds and CP/MTN structure, withdrawal of proceeds from the Disbursement Account for payment to KDSB is subject to the submission of Notice of Payment supported by documentary evidence on works done, certified by independent consultants and acknowledged by PKA. KDSB has also provided a corporate guarantee to VVB for construction performance amounting to 5% of the total contract sum.

Liquidity risk is mitigated through the maintenance of an Escrow Account which covers any potential shortfall in the Collection Account in order to meet any increase in interest obligations under the CP/MTN programme. Maintenance of a six-month coupon/interest for the bonds and CP/MTN in the Debt Service Reserve Account and a three-month buffer period between the projected date of receipt of funds from PKA and the scheduled principal repayment of the bonds every November provide further debt coverage protection. VVB has met its obligations of timely repayment of the bond and required designated account balances as of November 2008.

Contacts:
Ahmad Zaidi Basri 03-2090 2268 / zaidi@marc.com.my;
Khairul Emran Mahmud 03-2090 2278 / emran@marc.com.my