RAM Ratings reaffirms AA1 rating of SEP’s Sukuk, revises outlook to positive

RAM Ratings has reaffirmed the AA1 rating of SEP Resources (M) Sdn Bhd’s (SEP) RM150 mil Islamic Medium Term Notes (the Sukuk). We have also revised the outlook on the rating to positive from stable on the back of the transaction’s robust performance which outperformed RAM’s expectations.
 
SEP is an intermediate holding company with no business of its own. The repayment of its Sukuk is anchored by the stable, concession-backed cashflow of its wholly owned subsidiary, Budaya Positif Sdn Bhd (Budaya Positif). Budaya Positif is entitled to receive monthly Availability Charges (ACs) and Asset Maintenance Service Charges from Universiti Malaysia Perlis (Unimap) under a 22.5-year concession for the development of student hostels for the university in Padang Siding, Perlis.
 
SEP outperformed RAM’s debt repayment capacity expectations over the period in review, as measured by its annual finance service coverage ratio (FSCR), as our stressed assumptions of a three-month delay in the receipt of ACs and a loss on maintenance services charges did not materialise. Instead, Unimap’s payment track record remained commendable, averaging within a month of the invoice date while Budaya Positif’s maintenance services clocked in a profit as well. Against this backdrop, the Company’s FSCR on the latest payment date (June 2021) came in at about 2.67 times vs. our sensitised projection of about 2.1 times.
 
Given the tight cash-retention features of the transaction (no shareholder distribution, and any expenses exceeding 5% of the initial rating estimates require Sukuk Trustee approval), any outperformance in earnings and cashflow will have a meaningful effect on FSCRs for the remaining tenure of the Sukuk. After incorporating the same stressed assumptions, SEP’s minimum and average FSCRs are estimated at a respective 1.93 and 2.26 times over its Sukuk’s remaining tenure, exceeding the 1.80 times required for an AAA-rating for low-complexity PPP/PFI transactions.
 
The rating may be upgraded in the next 12-24 months if: (i) SEP’s FSCR is maintained above 1.80 times; and (ii) there is no material deterioration in the operating performance of the concession supporting SEP’s Sukuk.
 
We believe performance risk remains low due to the generally non-complex maintenance of the Project. Nonetheless, we note that that Budaya Positif’s monthly performance scores have trended downward (average for 1H 2021 and 2020: 83%, 2019: 88%) and will continue to monitor this. On balance, the scores were still well above the minimum 70% required to avoid the risk of termination under the concession whilst financial impact remained negligible (total deductions for non-compliance were less than 0.5% of maintenance service charges).
 
Moderating the transaction rating is SEP’s highly leveraged capital structure and termination risk. Despite SEP’s heavy debt load, RAM places more emphasis on the transaction’s cash-generating ability. Termination of the concession due to non-performance by Budaya Positif and/or Unimap is unlikely due to the generally non-complex maintenance of the Project. Under a termination scenario, the corporate guarantee extended by Pesona Metro Holdings Berhad, (Pesona Metro), which owns a 70%-stake of SEP, may provide financial relief. Pesona Metro is a mid-sized construction, manufacturing and trading company listed on Bursa Malaysia.
 
Published on 16 Nov 2021
 
Analytical contacts
Chuan Shyang Lin
(603) 3385 2536
shyanglin@ram.com.my
 
Davinder Kaur Gill
(603) 3385 2525
davinder@ram.com.my