MARC has lowered its ratings on Alpha Circle Sdn Bhd’s outstanding RM160 million Senior Sukuk Musharakah to AIS from AA-IS, and RM55 million Junior Sukuk Musharakah to BBBIS from AIS. The ratings outlook remains negative.
Our rating action is premised on lingering issues related to the foreign labour force in the wake of border closures amid the COVID-19 pandemic. In addition to hampering new foreign worker recruitment, the crisis has also led to administrative delays in permit renewals for existing foreign workers. These factors have resulted in a lower volume of foreign worker permit issuances and renewals, leading to Alpha Circle’s lower-than-projected cash flows. As a consequence of the cash flow shortfall, Alpha Circle has not been able to meet the finance service cover ratio (FSCR) covenant of 1.75x, leading to a technical default under the sukuk terms for which sukukholders have now granted a waiver.
Alpha Circle is the funding vehicle of NERS Sdn Bhd, which has a 12-year government contract ending in May 2023 to register foreign nationals entering and leaving Malaysia. NERS receives a RM50 payment for each work permit issued to or renewed by a foreign worker. We note that in 2020, the foreign worker permit volume was sharply lower at about 1.5 million due to the pandemic. In contrast, over the last five years, foreign worker permit issuance has hovered around 2 million p.a., providing a payment stream of about RM100 million p.a. to NERS.
In 2021, Alpha Circle has sukuk redemptions of RM20 million on February 23, and RM55 million on November 19. Its February redemption is expected to be met by a payment due from the government, following which it expects to build up cash from billings in the coming months for its November maturity. While foreign work permit issuances could improve in the near term in line with the government’s recent labour recalibration programme aimed at addressing significant labour shortages in certain economic sectors by regularising sizeable illegal migrants present in the country, there is uncertainty in terms of the response to the programme.
Our negative outlook therefore factors in the uncertainty that the foreign worker volume would improve sufficiently and on a timely basis to support Alpha Circle’s financial obligations. If the volume remains at the current level which will negatively impact Alpha Circle’s liquidity position, the ratings could be lowered to be consistent with the change in the company’s risk profile. Conversely, if there is a sharp rebound in the foreign worker volume to 2019 levels and/or the company receives sufficient external liquidity support, the outlook could be revised to stable.