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11 May | Tuesday
RAM Ratings assigns AAA final rating to Sabah Development Berhad’s proposed sukuk
RAM Ratings has assigned a final rating of AAA/Stable to Sabah Development Berhad’s (SD Bhd or the Group) proposed Islamic Medium Term Notes Programme of up to RM10 bil (the Proposed Sukuk). In doing so, we have reviewed the relevant final transaction documents. We find them to be in line with our expectations when the preliminary rating was assigned (published on 16 November 2020).
 
The rating is premised on SD Bhd’s highly strategic and important role to the Sabah state government (the State), and our expectation that extraordinary support from the State will be forthcoming if needed. SD Bhd was set up in 2015 as a direct wholly owned entity of the Sabah state government. The Group serves as a proxy funding vehicle for the Sabah state government, acting as a lender or investor in major socio-economic development projects in Sabah. 
 
SD Bhd’s importance is also underlined by Sabah International Petroleum Sdn Bhd’s (SIP, a wholly owned subsidiary of SD Bhd) instrumental role in driving the State’s ambitions within the upstream O&G industry, as the sole state-owned vehicle in this sector. SIP currently has interests in O&G exploration and production and is a provider of floating production storage and offloading (FPSO) vessels to the offshore O&G industry. While these operations are commercially driven, they provide additional earnings for the benefit of the State. 
 
With the planned sukuk issuance, SD Bhd’s financial profile is expected to weaken considerably. Apart from funding various development projects, SIP is bidding for the provision of a FPSO facility for Petronas Carigali’s Limbayong O&G field development off the shores of Sabah. Assuming a RM3 bil increase in debt through the next three years (2021-2023), SD Bhd’s gearing ratio is expected to rise to 2.0-2.5 times (after analytical adjustments) (end-December 2019: 1.1 times ). Likewise, the Group’s cash flow debt coverage levels are envisaged to stay weak, at below 0.1 times due to its projected incremental debt. 
 
The Finance Service Reserve Account (FSRA) requirement under the transaction terms moderates liquidity risk. SD Bhd has represented that sukuk issuances will initially be capped at RM3 bil. Confirmation from RAM that the rating will not be adversely affected is among the conditions precedent for cumulative outstanding issuances beyond RM3 bil under the Sukuk Programme.
 
___________________________
1SD Bhd’s consolidated financial statements for FY Dec 2020 are not available as of the date of publication.
 
Published on 11 May 2021
 
Analytical contact
Amy Lo 
(603) 3385 2509
amy@ram.com.my
 
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my
 
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
 
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
 
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
 
© Copyright 2021 by RAM Rating Services Berhad
source: RAM Ratings
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