MARC has affirmed Makro Utama Sdn Bhd’s (Makro) RM100.0 million Al-Istisna’ Bonds (the Bonds) rating of A+ID. The outlook of the rating is stable. The affirmed rating reflects the strong credit quality of the sole obligor, the Department of Irrigation and Drainage Malaysia, and the moderately low execution risk entailed in the RM402.9 million Sungai Muda Package 2 Flood Mitigation Project, the progress billing collections of which supports the debt servicing of the rated bonds. Although construction progress is slightly behind schedule, the delay is mitigated by the adequate buffer which exists between expected interim completion milestones and scheduled principal amortization. The project delay stems primarily from a delay in the issuance of the bonds and subsequent disbursement, and weather challenges. MARC draws comfort from the fact that no cost overruns have been incurred and measures have been initiated to expedite the progress of the project.

Makro is a special purpose vehicle wholly owned by construction and engineering company Redmax Sdn Bhd (Redmax) and incorporated to facilitate the issuance of the Bonds. Redmax is a registered Bumiputera ‘Class A’ license contractor under the government agency Pusat Khidmat Kontraktor (PKK). Redmax undertakes civil and infrastructure works, and has completed a number of flood mitigation projects in Kedah and Penang. The Bonds are being partially utilized to fund the working capital requirements of the Sungai Muda Package 2 Flood Mitigation Project awarded by the Department of Irrigation and Drainage Malaysia, or Jabatan Pengairan dan Saliran Malaysia (JPS), to Redmax.

As at end-November 2009, overall completion of the project was at 6.2% compared to the targeted 10.9% due to a delay in Bond issuance and poor weather conditions. The Bond issuance, which was originally targeted for the first half of 2009, was issued in August 2009 while land acquisition was completed in early December 2009. Redmax has encountered delays in carrying out dredging works due to pre-disbursement working capital constraints in addition to heavy rain and flooding in November 2009 but steps have been taken to ensure timely completion of full construction works of the project by May 5, 2012. MARC believes that the present construction delay will have limited impact on Makro’s ability to service the bonds based on MARC’s cash flow sensitivity analysis. In the event of a construction delay, Redmax will incur the liquidated ascertained damages (LAD), thus insulating Makro from LAD risk.

The fixed price RM402.9 million project will expose Makro to raw material price fluctuation risk. Mitigating this in the near term is the reduction in overall raw material prices as a result of the recent economic slowdown. In addition, the allowed variation of price (VOP) on 14 specified construction materials, including steel, and aggregates by the government, effective January 1, 2008, will facilitate partial pass-through of any price increases to the government. 

Contacts:
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my;
Khairul Emran Mahmud, 03-20902278/ emran@marc.com.my;
Sharidan Salleh, 03-2090 2243/ sharidan@marc.com.my