RAM Ratings has assigned a preliminary AA1/Stable rating to Widad Concession Sdn Bhd’s (the Issuer) proposed RM310 mil Sukuk Wakalah Facility (the Proposed Sukuk).
Wholly owned by Widad Group Berhad (WGB), Widad Concession was set up to finance the acquisition cost of the private public partnership (PPP) or project finance initiative (PFI) project held by YBK Usahasama Sdn Bhd (YBKU). YBKU holds a 23-year concession for the development and maintenance of the Universiti Teknologi MARA (UiTM) campus in Jasin, Melaka (the Project), which expires on 2 February 2034. WGB completed the acquisition of YBKU’s immediate holding company, Serendah Heights Sdn Bhd, in end-March 2021. Serendah Heights’ business activity is only limited to YBKU. Listed on Bursa Malaysia, WGB is involved in the construction, integrated facilities management, concession, waste management and railway businesses.
Proceeds from the Proposed Sukuk will be used to subscribe to unrated murabahah stocks issued by YBKU (to Widad Concession), funds from which will in turn be used by YBKU to retire its existing liabilities. Part of the sukuk proceeds will be retained at Widad Concession to provide the transaction with some liquidity support, while the remainder will be used to repay the Issuer’s bridging loan for the acquisition.
The assigned rating is anchored by YBKU’s stable and prompt concession-backed cashflow, as well as the restrictions, limitations and covenants imposed under the Proposed Sukuk. The transaction terms include constraints on any other business, indebtedness, distributions to shareholders and expenses. Concession cashflows will be deposited in designated accounts operated and managed by the security trustees (except the Operating Account, which will be jointly operated with YBKU). As these terms extend to key transaction parties, i.e., Widad Concession, Serendah Heights and YBKU, we have consolidated their cashflows and treated them as a single economic entity in our rating assessment.
From a cashflow perspective, Widad Concession will be entirely dependent on YBKU and Serendah Heights to service its obligations under the Proposed Sukuk. Semi-annual murabahah stock repayments and dividends from the two entities will support these obligations. Since the completion of the campus on 30 January 2014, YBKU has received prompt payments from UiTM. Performance-related deductions have been minimal at less than 1% per annum. Despite so, our stressed cashflow factors in delayed payments from UiTM, elevated expenses and higher performance-linked deductions without reimbursements from the subcontractor, following which the Proposed Sukuk’s debt servicing coverage, as measured by an annual aggregate finance service coverage ratio (FSCR), will remain robust and in line with its rating. The FSCR is envisaged to exceed 1.65 times (with cash, post-distribution) throughout the Proposed Sukuk’s tenure.
Moderating the rating is the somewhat complex transaction structure involving multiple related parties and a lack of relevant experience on the part of the newly appointed maintenance contractor – a WGB subsidiary. Project maintenance risk is mitigated by the recruitment of staff from the previous subcontractor and the contractual arrangement to pass through any performance-linked deductions to the new maintenance contractor. The transaction is also considered highly leveraged.
In the unlikely event that the concession is terminated, the Government of Malaysia has no direct obligation to Widad Concession’s sukukholders. A corporate guarantee extended by WGB as added transaction security, and a cash deficiency top-up undertaking may afford sukukholders further financial relief under any adverse circumstances.
Published on 06 Sep 2021
Chu Jia Ying
(603) 3385 2519
Davinder Kaur Gill
(603) 3385 2525