The rating reflects the credit strength of the Terengganu State Government to meet the unconditional and irrevocable payment obligations on the Facility Payment Certificates (FPC) issued for work done under the KTU water supply project. MARC maintains a sub-sovereign credit rating of AA-/Stable on Terengganu with the rating underpinned by oil royalty payments and the expectation of continued economic and financial support from the federal government.
MARC also views the Sukuk Wakalah structure positively, given that it provides protection to sukukholders as each tranche of sukuk issued or to be issued is/will be backed by FPC approved by the state government for works that have been completed. As such, sukukholders do not assume any construction risk or termination risk. Additionally, there is no right of set-off against any amounts that KAJV may be owing the state government including liquidated ascertained damages, if any. As the construction is undertaken on a fixed-price contract of RM797.1 million, contractors bear the cost overrun risks.
The KTU project involves the construction of a 120-million litres per day (MLD) conventional water treatment plant (WTP) and a 28-MLD membrane WTP. It also includes retrofitting, refurbishing and rehabilitating five existing WTPs in Kuala Terengganu. The project has faced delays, owing largely to approval delays for access to key roads for pipe-laying works. The project was initially scheduled to be completed in May 2020; however, nearing this deadline, the construction progress was only 59.5%, resulting in the need for an extension. An extension to May 14, 2022 has since been granted by the state government.
Based on the payment schedule, the deferred payments received from the state government will be sufficient to meet KAJV’s financial obligations under the Sukuk Wakalah Programme. KAJV will receive its first deferred payment of RM108.8 million in 12 monthly instalments starting from June 2020 to May 2021. To date, the state government has honoured its payment obligations in a timely manner. All subsequent deferred payments will remain on an annual basis beginning June 14, 2021.