MARC has lowered its ratings on Alpha Circle Sdn Bhd’s outstanding RM140 million Senior Sukuk Musharakah to BBBIS from AIS and RM55 million Junior Sukuk Musharakah to BBIS from BBBIS.
The downgrades reflect increased concerns on Alpha Circle’s ability to meet its remaining sukuk repayments as its cash flow has been substantially impacted by the operational disruption in foreign worker permit issuances and renewals amid various restrictions imposed to combat the COVID-19 pandemic since 1Q2020. While the risks abated somewhat from 4Q2020 onwards with some improvement in foreign worker volume from January to April 2021, the recent imposition of MCO 3.0 and the freeze on the new recruitment of foreign labour have now limited any meaningful recovery in foreign worker volume in the near term. Alpha Circle has also faced payment delay that has compounded its tight liquidity position.
In light of these factors, the volume of foreign worker permit issuances and renewals will be lower than projected, leading to cash flow shortfalls. We note that between January and April 2021, the average monthly foreign worker permit volume fell by about 30% y-o-y to about 115,000 (average during 1Q2020: 150,000), providing a lower payment of about RM5.8 million per month to Alpha Circle’s parent NERS Sdn Bhd for which it is the funding vehicle. NERS receives payments based on foreign worker permit issuances and renewals under a 12-year government contract ending in May 2023. Assuming the current payment trend is maintained, Alpha Circle is likely to have circa RM45 million in its finance service account against a repayment of the senior sukuk of RM55 million due in November 2021. It also has payments totalling RM85 million in 2022 and RM55 million of Junior Bonds in May 2023.
We understand that among the options the company is pursuing to address its current predicament is to restructure the sukuk. We have also noted that in the recent past, its shareholder has rendered financial support to bridge liquidity gaps. The ratings remain on MARCWatch Negative with future rating actions largely determined by the measures to be undertaken by the company over the next three months.