MARC has placed its AIS rating on Matang Highway Sdn Bhd's (Matang) RM70.0 million Sukuk Musharakah on MARCWatch Negative. The rating action affects RM15.0 million of outstanding Sukuk. Matang is a wholly-owned single-purpose funding vehicle of Zecon Berhad (Zecon). Its payment obligations under the fully-amortising Sukuk are primarily funded by progress payments collected from JKR Sarawak under a turnkey contract to construct a highway linking Kuching City to the State of Sarawak's new Federal Administrative Center (Matang Route Project).

The MARCWatch Negative placement reflects concern about Matang's ability to adequately meet the May 2011 redemption of its remaining outstanding Sukuk. Matang needs additional liquidity of RM1.898 million to meet the portion of its upcoming payment obligations under the Sukuk which are currently not covered by existing balances in designated accounts. The construction progress on the second and final phase of the Matang Route Project continues to be substantially behind schedule. Zecon, Matang's parent and turnkey contractor for the Matang Route Project, has expressed its commitment to fund the gap between the available liquidity in designated accounts for the Sukuk and the upcoming final redemption. Nonetheless, MARC understands that Zecon is in the midst of negotiating a RM31.4 million debt restructuring. Given Zecon's own financial difficulties, MARC regards the likelihood of sufficient and timely financial support from Zecon as uncertain.

Construction progress for the second and final phase of the Matang Route Project (Revised Matang Route or RMR) was 27.0% as of August 31, 2010 against revised scheduled progress of 82.8%. Zecon is seeking a third extension of time for completion of the RMR to March 2012; the second extension had pushed back the project completion date to end-July 2011. Given that the new estimated completion date is now well beyond the Sukuk term, MARC believes that it is now more challenging than previously anticipated for Matang to achieve cash flows required to meet the  final Sukuk redemption.

Matang has reduced its monthly payments into the sinking fund account (SFA) with the approval of Sukukholders as a result of its lower actual cash generation. The upcoming Sukuk redemption is 65% funded based on the RM9.8 million balance in Matang's SFA as at December 10, 2010. However, this is still short of its November 2010 SFA required balance of RM10.5 million. Matang's revised sinking fund payment schedule requires monthly payments of RM1.5 million each to be deposited into the SFA from September 2010 through February 2011 to fully fund the upcoming Sukuk redemption by end-February 2011. Meanwhile, the prospects for the collection of a disputed RM11.0 million claim arising in respect of works on the first phase of the Matang Route Project (Original Matang Route) appear to be increasingly uncertain.

Possible internal liquidity sources to fund the SFA include outstanding RMR construction progress claims amounting to RM8.4 million for the months of August, September and October and/or future RMR work-in-progress billing for the remaining four-month period from November 2010 through February 2011.  There is also an estimated RM2.9 million buffer maintained in Matang's Finance Service Reserve Account (FSRA) over and above the required equivalent amount of two semi-annual profit payments. (The FSRA is funded to the extent of RM3.7 million as of December 10, 2010.)

The rating will be lowered should Matang not meet the revised scheduled payments into the SFA by December 19, 2010. Conversely, if its SFA and FSRA balances are sufficient to fully fund the final redemption of the Sukuk by February 2011, MARC will remove Matang's rating from MARCWatch Negative.
 
Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
Khairul Emran bin Mahmud, +603-2082 2278 / emran@marc.com.my;
Ezien Hoo, +603-2082 2267 / ezien@marc.com.my.