MARC has affirmed its ratings on the four special purpose vehicle debt issuances which are supported by deferred payment receivables from Port Klang Authority (PKA) in respect of the land purchase and development costs of the Port Klang Free Zone (PKFZ) as follows:

*Note:
  ABSB – Asset Backed Serial Bonds               FRSB – Fixed Rate Serial Bonds
  CP – Commercial Papers                               MTN – Medium Term Notes

The affirmed ratings reflect MARC's continued alignment of the ratings with the fundamental creditworthiness of the federal government of Malaysia on the basis of the latter's willingness and capacity to support the deferred obligations of PKA under the respective agreements in relation to the purchase of land and development works of PKFZ. The federal government has continued to abide by the support letters issued by the Ministry of Transport (MOT) notwithstanding uncovered irregularities surrounding the issuance of the four letters and ongoing legal suits against turnkey developer Kuala Dimensi Sdn Bhd (KDSB). Concurrently, MARC has withdrawn its MARC-1/AAA ratings on FZCB’s undrawn RM70.0 million CP/MTN facility which had recently been cancelled.

The PKFZ project was initiated and endorsed by the government with the objective of elevating the status of Port Klang into a national load centre and regional transhipment hub. To date, the project's actual occupancy remains low and is still generating insufficient revenue to cover its operating expenses. PKA's payments to KDSB continue to be largely funded by a RM4,632 million soft loan from the Ministry of Finance. The committed nature of the repayment source for the rated obligations continues to mitigate PKA's weak standalone credit profile, as its status as a statutory corporation under the purview of the MOT.

The contractual deferred payments to the four special purpose entities continue uninterrupted, supporting the timely payment of their respective rated obligations, thus far averting payment default on the rated obligations. MARC notes that the final payment of RM130.57 million to FZCB by PKA in July 2010 for new additional development works of PKFZ was sufficient to meet FZCB’s final principal and interest obligations on the bonds due on November 26, 2010. MARC anticipates that PKA’s final payment to VVB in July 2011 together with balance in VVB’s escrow account of RM39.3 million as at October 30, 2010 will be sufficient to meet its CP/MTN obligations.

MARC has maintained its negative outlook on all the ratings to reflect the possibility of waning government support over time for the full and timely payment of obligations as a result of the perceived RM4,632 million bail-out by the government and ongoing legal suits pursued by PKA on KDSB. While a revision of MARC's support assumptions will very likely result in negative rating pressure, there are no recent developments to warrant a change in our support assumption. Since our last rating action on January 7, 2010, further affirmative statements by government officials pertaining to support for the deferred payment obligations of PKA have been noted. The negative outlook also incorporates increased uncertainty as to the timeliness of payment transfers from PKA, as witnessed with earlier incidences of non-compliance with the required build-up of debt reserves ahead of payment dates. The foregoing increases the risk of a credit cliff situation in which the debt rating(s) of one or more of the four issuers could be lowered to 'D' upon the occurrence of missed payment.

Contacts:
Khairul Emran Mahmud, +603 2082 2278 / emran@marc.com.my;
Sandeep Bhattacharya, +603 2082 2247 / sandeep@marc.com.my.