Credit Ratings & Related Assessments
Economic & Fixed-Income Analysis
Analytics Consulting Services
Posted Date: November 5, 2020
MARC has assigned its preliminary rating of AA-IS to special-purpose vehicle SHC Capital Sdn Bhd’s proposed RM80.0 million issuance under its RM200 million IMTN (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) and was set-up to issue the Sukuk Wakalah, proceeds of which will be on-lent to its parent for debt refinancing and general working capital purposes. TUNAS owns and operates a district cooling system (DCS) plant and underground piping network in the 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 assigned rating incorporates a high degree of earnings visibility under a 20-year cooling energy supply agreement with the government (via the Ministry of Education) which expires in 2037. The supply agreement is between the government and Sime Darby Property Selatan Satu Sdn Bhd (SDPSS). SDPSS had sub-contracted the agreement to TUNAS, a wholly-owned subsidiary of Sin Heng Chan (Malaya) Berhad and which has prior experience in DCS plant operations. The rating also factors in the pass-through nature of operating costs and positive operating cash flow, albeit moderate, ranging from RM7 million to RM9 million p.a. that comfortably addresses financial obligations under the rated Sukuk Wakalah. Operational risk is also low with predictable operations and maintenance (O&M) expenses.
MARC views the risk of termination of the chilled water supply contract 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’ strong operating record since the plant started operations in 2017 also provides protection.
The transaction is, however, sensitive to payment delays and any unexpected material variations from budgeted O&M expenses could affect the issuer’s debt-servicing ability. Nevertheless, the average collection period of 46 days has generally been within credit terms while O&M expenses have largely been balanced. This notwithstanding, MARC’s rating case has applied a longer 90-day collection cycle and a 3% stress to operating expenses. Financial projections through 2037 show an average and minimum annual finance service cover ratio (FSCR) of 2.0x and 1.6x against a covenant of 1.25x. The sukuk is fully amortising, with annual debt service obligations projected at no more than RM8.72 million (highest in fiscal 2022).
The stable outlook reflects MARC’s expectations of sustained operating performance in the next 12-18 months.