MARC has affirmed its ratings on Alpha Circle Sdn Bhd’s RM540 million Senior Sukuk Musharakah and RM55 million Junior Sukuk Musharakah at AA-_IS and A_IS. The ratings outlook has been revised to negative from stable. The current outstanding of senior sukuk is RM160 million and junior sukuk is RM55 million.

Alpha Circle is the funding vehicle of NERS Sdn Bhd, the contractor for the 12-year government contract to undertake the registration of foreign nationals entering and leaving Malaysia for which the contractor receives a RM50 payment for each work permit issued to or renewed by a foreign worker. The assured payment stream from the government for the service NERS renders remains the key rating driver for the rating affirmation. With around two million foreign worker permits issued/renewed annually over the last five years, NERS received circa RM100 million p.a.

The revised outlook to negative reflects concerns that the increased risk of a decline in foreign worker permits issued or renewed amid the COVID-19 pandemic would weaken NERS’ cash flow generation. This risk has been compounded by administrative and operational disruptions during the movement restriction period that have affected the timely receipt of payments by NERS. MARC understands that the disruptions have resulted in a payment backlog of up to 300,000 applications, translating into delayed payments of up to RM12.0 million for Alpha Circle, based on an 80:20 split with NERS’ operational requirement.

For financial year ended June 30, 2020 (FY2020), the volume of foreign worker permits was 2.04 million (FY2019: 2.30 million). Had the payments not been delayed, Alpha Circle would have registered a finance service cover ratio (FSCR) of 1.78x for FY2020, above the covenanted FSCR of 1.75X. However, as a result of the delay, it faces a potential breach in the FSCR for audited FY2020. The rating agency has been informed that the management is currently working with the relevant government agency to resolve the payment backlog. NERS’ shareholder had injected RM5.0 million into the finance service account in October 2020 to support its liquidity position in the interim.

MARC is monitoring the situation with regard to the payment backlog as well as on the volume of foreign workers in the country and the government policies on foreign labour in light of the pandemic. Alpha Circle’s ratings would be downgraded if there is no timely resolution on the payment backlog or if foreign worker permit issuances decline sharply in the near term. The aforementioned factors would lead to a breach in the covenanted FSCR of 1.75x. In MARC’s assessment, Alpha Circle’s FSCR would stand above the covenanted FSCR in FY2021 and FY2022 on a minimum of 2.02 million foreign work permit issuances annually. This assumption factors in NERS’ ability to resolve the payment backlog in FY2020.

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