MARC has affirmed its AA-IS rating on AZRB Capital Sdn Bhd’s (ACSB) issuance of RM535.0 million Islamic Medium-Term Notes (Sukuk Murabahah) with a stable outlook.
The affirmed rating incorporates the strength of the concession receivables from the government which are channelled to ACSB’s designated accounts for its sukuk payment obligations. The concession receivables in the form of availability payments (AP) and maintenance charges (MC) are received by sister company Peninsular Medical Sdn Bhd (PMSB) and have been assigned to ACSB. The concession agreement with PMSB is for the design, building and maintenance of a 300-bed teaching hospital (IIUM Medical Centre) for International Islamic University of Malaysia (IIUM) in Kuantan, which has been operational since 2016. The expiry of the concession agreement in 2038, later than the sukuk maturity in 2031, provides additional comfort.
The credit profile of sponsor-cum-shareholder, Ahmad Zaki Resources Berhad (AZRB), the parent of both ACSB and PMSB, remains a moderating factor. AZRB has provided a guarantee on ACSB’s financial obligations. Nonetheless, ACSB is insulated from risks associated with AZRB by its bankruptcy remote status while the shares in PMSB have been assigned to sukukholders. PMSB has no other financial obligation save for the AZRB-subscribed Redeemable Convertible Preference Shares (RCPS-i) from the proceeds of the rated sukuk.
During 1Q2020, ACSB received concession receivables from PMSB as projected where it receives AP and MC payments of about RM5.8 million and RM3.2 million monthly. The transfer of funds for PMSB’s operating expenditure requirement from ACSB has also been in line with the asset maintenance forecast. As at 1Q2020, ACSB has a cash holding of about RM79.4 million. The first principal repayment of the sukuk amounting to RM100.0 million falls due in 2022, providing time for ACSB to build up its cash reserve.
The maintenance services for IIUM Medical Centre are undertaken by Advance Pact Sdn Bhd, a provider of such services for 22 other government hospitals domestically and a few hospitals in the Middle East region. PMSB has a back to back arrangement with Advance Pact in which any deduction in maintenance fees from IIUM will be passed on to Advance Pact. The rating agency understands that there has been no breach in Advance Pact’s obligations at IIUM Medical Centre as of date.
AZRB has an established track record in the engineering and construction sector and has expanded to the property, concession, plantation, and oil and gas sectors. Its financial performance in 1H2020 and 2019 was weighed down by a one-off construction expense and forex translation losses from its plantation in Indonesia, leading to a weaker financial performance. 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 mid-2021 with a total estimated construction cost of about RM1.55 billion. Due to the project’s debts, AZRB’s borrowings remain high at RM2.98 billion as at end-1H2020. Excluding project-related financing, the group’s net debt-to-equity ratio would stand at about 2.56x against total equity of RM363 million as at end-June 2020.
The stable outlook over the next 12-18 months reflects MARC’s expectations that ACSB will continue to receive concession receivables that would remain sufficient to meet its contractual obligations under the transaction structure.
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