MARC has affirmed its rating of AA_IS on BEWG (M) Sdn Bhd’s (BEWG) RM400 million Sukuk Wakalah with a stable outlook. The rating is underpinned by the credit strength of the Terengganu state government which will provide periodic payments under a deferred payment structure upon completion of a water treatment project in the state. The rating also incorporates a one-notch rating uplift based on the credit strength of BEWG’s parent Beijing Enterprises Water Group Limited (BEWGL), which has provided an unconditional and irrevocable corporate guarantee during the construction phase and a letter of undertaking to provide liquidity support to meet financial obligations on the sukuk during the post-construction phase of the project.

The RM499 million water treatment project was awarded to BEWG by the Terengganu state government under a design-and-build contract with a deferred payment feature. The project involves refurbishing and upgrading an existing water treatment plant in Bukit Sah, constructing a new water intake, pumping station and service reservoirs in Bukit Sah and Bukit Kolam as well as piping systems for the existing PETRONAS water treatment plant in Labohan. The overall project is scheduled to be completed and handed over to Terengganu state-owned Syarikat Air Terengganu Sdn Bhd (SATU) in November 2018 following which a five-year deferred payment phase will commence within 45 days after the receipt of Certificate of Practical Completion (CPC).

MARC notes that there has been a delay in the construction progress with about 44.6% of works completed against a planned 69.2% as at end-February 2018. The delay has been attributed to land acquisition delays during the early stages and unfavourable weather conditions in Terengganu. The company aims to align the construction progress with the planned schedule by end-June 2018. MARC draws comfort from the 20-month gap between the scheduled construction completion in November 2018 and the first scheduled sukuk redemption in July 2020 which should provide a sufficient time buffer for BEWG to complete the project construction.

Post-construction, the state government will make six payments to BEWG totalling RM686.9 million over a five-year period. The payments will be captured in a collection account as a build-up towards annual profit and principal repayments. MARC draws comfort from the requirement to maintain a minimum balance equivalent to the next six months’ profit and principal payments in the finance service reserve account. The first deferred payment of RM129.6 million would be sufficient to meet BEWG’s first scheduled sukuk redemption of RM120.0 million in July 2020.

The company’s cash flow projections indicate that BEWG would achieve minimum and average financial service cover ratios (FSCR) of 2.21 times and 3.26 times during the tenure of the sukuk against the covenanted FSCR of 1.75 times. Based on MARC’s sensitivity analysis, the company’s cash flow can withstand an increase of 10% in construction costs before breaching its covenanted FSCR. While the strength of the payment stream reflects the state government’s ability to meet the scheduled payments, any potential payment delays and cost overruns will be addressed by BEWGL’s liquidity support. The sukuk structure is supportive of a build-up of cash reserves as dividends to its shareholder and any reimbursement to BEWG can only be made if the project FSCR exceeds 2.00 times after such payments are made.

The stable rating outlook incorporates the sufficient protection provided to sukukholders during the construction and post-construction phases. MARC will monitor any protracted construction delays that may have implication on BEWG’s contractual obligations. Any revision in the rating and/or outlook will also hinge on changes in the credit strength of BEWGL and/or the Terengganu state government.

Contacts:
Saifuruddin Othman, +603-2717 2945/ saifuruddin@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my.