MARC has affirmed its rating of AA-IS on special-purpose vehicle SHC Capital Sdn Bhd’s RM80.0 million issuance under its RM200 million Islamic Medium-Term Notes (Sukuk Wakalah) Programme. The rating outlook is stable. There are no expectations of further drawdown in the medium term; any further drawdown will require a re-assessment of the rating.
SHC Capital is wholly owned by Tunas Cool Energy Sdn Bhd (TUNAS), which in turn is a 100%-owned subsidiary of Sin Heng Chan (Malaya) Berhad. SHC Capital was set up to issue the Sukuk Wakalah for parent TUNAS, which owns and operates a district cooling system (DCS) plant and underground piping network in Pagoh Education Hub (PEH) in Johor. The DCS plant generates chilled water for air conditioning that is distributed through the underground piping to four higher learning institutions within PEH.
The rating affirmation considers SHC Capital’s high degree of earnings visibility under a minimum take-or-pay, 20-year cooling energy supply agreement with the government (via Ministry of Education) ending 2037. The supply agreement is between the government and Sime Darby Property Selatan Satu Sdn Bhd; it was later sub-contracted by the latter to TUNAS. The rating factors in the pass-through nature of operating costs and a positive albeit moderate operating cash flow, ranging from RM7 million to RM9 million p.a. that comfortably addresses the financial obligations under the rated Sukuk Wakalah. Operational risk is also low with predictable operations and maintenance (O&M) expenses.
We also view contract termination risk as low given the essentiality of the service TUNAS provides in PEH which has no ready alternative for cooling. In addition, the underground pipe network connecting TUNAS’ DCS and the buildings also creates a very strong barrier to entry. TUNAS’s strong operating record since the plant started operations in 2017 also provides protection.
The transaction is sensitive to payment delays, and any unexpected material variations from budgeted O&M expenses could affect SHC Capital’s debt-servicing ability. However, the debtors ageing report up to end-August 2021 indicates no collection issues, with all payments received according to the credit terms of within 30-45 days. O&M expenses have also been kept stable over the review period. This notwithstanding, MARC’s rating case has applied a longer 90-day collection cycle and a 3% stress to operating expenses. Under this scenario, we expect minimum and average annual finance service cover ratio to be around 1.8x and 2.2x against the covenanted 1.25x. The sukuk is fully amortising, with annual debt service obligations projected at no more than RM8.7 million (highest in fiscal 2022).
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