MARC continues to maintain Matang Highway Sdn Bhd’s (Matang) AA-IS rating on its RM70.0 million Sukuk Musharakah issuance on MARCWatch Negative where it had been placed since August 6, 2009. The rating was originally placed on MARCWatch Negative to highlight MARC’s concerns over the delay in Matang’s second phase of construction of the Matang Route Project (Revised Matang Route or RMR) for Jabatan Kerja Raya Sarawak (JKR Sarawak). The continuing MARCWatch placement incorporates both the knock-on consequences of the construction delay on Matang’s immediate liquidity as well as Matang’s decision to seek sukukholders’ indulgence to vary scheduled payments into the sinking fund account (SFA).

Since our last rating action, the Original Matang Route (OMR) had achieved practical completion in August 2009 and Zecon Berhad (Zecon), the turnkey contractor for the highway, has submitted its final claim on the works done to JKR Sarawak. However, MARC understands that Zecon is currently in dispute with JKR Sarawak over certain aspects of OMR which may affect payment on outstanding claims amounting to RM11.0 million. Meanwhile, the progress works on the RMR remains significantly behind the original schedule which targets completion of the RMR by March 5, 2011. Although JKR Sarawak has recently granted an Extension of Time (EOT) for completion of RMR, the ability of the project to service the Sukuk is dependent on the project’s adherence to the original schedule. As a result, actual collections in respect of the RMR up to July 2009 only constitute 15.6% of contract value. The foregoing developments have evidently affected Matang’s ability to build up its SFA. The SFA is only funded to the extent of RM8.5 million whereas RM12.0 million is required by-end November 2009 to address the upcoming May 2010 principal payment of RM20.0 million.
 
To resolve the MARCWatch placement, MARC will monitor the outcome of Matang’s indulgence solicitation and seek further clarity regarding its proposed measures to address its liquidity shortfall between now and May 2010. The rating may be lowered upon completion of our review if MARC believes that Matang’s proposed measures are insufficient to fully mitigate the effects of the construction delay on its ability to service its upcoming obligations under the Sukuk.

Contacts:
Sandeep Bhattacharya 03-2090 2247 / sandeep@marc.com.my;
Khairul Emran Mahmud 03-2090 2278 / emran@marc.com.my