MARC has assigned a preliminary rating of AA-_IS to special purpose vehicle AZRB Capital Sdn Bhd’s (ACSB) proposed issuance of up to RM535.0 million Islamic Medium-Term Notes (Sukuk Murabahah) with a stable outlook.

Wholly owned by Bursa Malaysia-listed Ahmad Zaki Resources Berhad (AZRB), ACSB was set up to issue the proposed Sukuk Murabahah, proceeds of which will be on-lent to parent AZRB which would in turn utilise the sum (1) to subscribe to Shariah-compliant Redeemable Convertible Preference Shares (RCPS-i) to be issued by its wholly-owned subsidiary, Peninsular Medical Sdn Bhd (PMSB), amounting to RM344.0 million and (2) the balance for general working capital purposes.

PMSB holds the concession to design, build and maintain a 300-bed teaching hospital for the International Islamic University of Malaysia (IIUM). The concession agreement expires in 2038, later than the sukuk maturity in 2031. The construction of the teaching hospital (IIUM Medical Centre) in Kuantan was completed in 2016 following which PMSB has been receiving concession receivables in the form of availability payments and maintenance charges.

The assigned rating considers the assured payment stream through the concession receivables from the Malaysian government as sufficient to meet the financial obligations under the proposed sukuk. The concession receivables from PMSB will be channelled to the issuer’s designated accounts for the sukuk payment obligations. The rating is also supported by the absence of construction completion risk as the IIUM Medical Centre is already operational and is in the third year of its asset management phase. Moderating the rating are (1) the transaction structure that necessitates fulfilment of several intercompany financing obligations involving ACSB, AZRB and PMSB, and (2) the moderate credit profile of sponsor-cum-shareholder AZRB which will provide a Kafalah guarantee on all payment obligations of the issuer.

PMSB will repay its existing borrowings using proceeds from the RCPS-i, and concurrently transfer all existing cash in its project account and future concession receivables to ACSB’s collection account towards meeting the financial obligations under the proposed sukuk. All securities including shares of PMSB as well as rights and benefits to the intercompany financing agreements will be charged and/or assigned for the benefit of the security agent.

ACSB will receive a total of about RM1,768.7 million in concession receivables from PMSB during the tenure of the proposed Sukuk Murabahah. The rating agency also notes that an amount transferred on a monthly basis to PMSB to undertake maintenance services will be limited to an annual asset maintenance budget set for the entire sukuk tenure. Any shortfall in this regard will be borne by AZRB. Maintenance services for the IIUM Medical Centre are undertaken by Advance Pact Sdn Bhd, a provider of such services for 22 government hospitals domestically and other hospitals in the Middle East region. The maintenance services are carried out under a long-term contract between PMSB and Advance Pact, covering the asset maintenance period. The rating agency understands that there has been no breach in Advance Pact’s obligations at the IIUM Medical Centre as of date.

In respect of the holding company, AZRB has an established track record in the engineering and construction (E&C) sector and has expanded to the property, concession, plantation, as well as oil and gas sectors. For 2018, revenue grew by a strong 27.9% y-o-y to RM1,228.6 million, driven mostly by E&C activities. However, margin compression due to construction cost increase led to a sharp decline in pre-tax profit to RM24.8 million. The weak profitability trend is expected to persist in 2019. AZRB’s major project, the 36.16-km East Klang Valley Expressway (EKVE), is undertaken by wholly-owned subsidiary EKVE Sdn Bhd, which is the concessionaire of the expressway. Completion is expected by July 2020 with the construction cost estimated at about RM1.55 billion. As a result of the project finance debt, AZRB’s borrowings remain high at RM2.6 billion as at end-1Q2019. Excluding the project-related financing, the group’s net DE ratio would stand at about 0.73x against total equity of RM473 million as at end-December 2018.

The stable outlook incorporates MARC’s expectation that the concession receivables to ACSB will be sufficient to meet its contractual obligations under the transaction structure and that the credit profile of its parent remains within expectations.

Contacts:
Raj Shankar, +603-2717 2956/ rajshankar@marc.com.my;
Taufiq Kamal, +603-2717 2951/ taufiq@marc.com.my