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RAM Ratings assigns final rating of AA2 to Widad Capital's Sukuk.

RAM Ratings has assigned a final rating of AA2/Stable to Widad Capital Sdn Bhd's (Widad Capital or the Company) proposed Sukuk Murabahahh Programme of up to MYR 110.0 million in Nominal Value (the Programme).

Widad Capital is a wholly owned subsidiary of Widad Builders Sdn Bhd (Widad Builders). The latter has been awarded a comprehensive facilities maintenance contract (the Contract) with the Public Works Department for the management, operations and maintenance (O&M) of the National Palace on Jalan Tuanku Abdul Halim, Kuala Lumpur (formerly Jalan Duta), effective for a period of seven years commencing July 2015. Effective 25 July this year, the Contract has been novated from Widad Builders to Widad Capital, with the former appointed as the subcontractor to undertake the facilities maintenance work.

The rating is supported by monthly payments from a strong counterparty - the Public Works Department - given that the ultimate obligor of payments is the Government of Malaysia (GoM). Work is carried out in accordance with the maintenance schedule stipulated in the Contract which underpins the predictability of Widad Capital's revenue, estimated to be up to MYR 409.8 million during the 5.5-year tenure of the Proposed Sukuk. That said, a portion of maintenance work (up to 15.7 per cent of contract value) is provisional in nature, subject to the GoM's approval, and may be more fluid in terms of timing.

Widad Capital possesses a strong debt-servicing ability. Its respective stressed minimum and average Finance Service Cover Ratios (with cash, calculated over a 12 month-period on profit/principal payment months) are expected to come in at a strong 1.94 times and 3.44 times. Our sensitivities include benefit accorded to half of the provisional sum and a delay of three months in the receipt of proceeds given that the transaction is sensitive to timing delays, despite prompt payments to date. Widad Capital's margins are essentially fixed as cost overruns from maintenance work (except for some overheads) or deductions for the failure to meet key performance indicators will be borne by Widad Builders as the subcontractor. Separately, based on Widad Capital's financing structure, a sizeable 73.7 per cent of proceeds will be advanced to its parent, although this sum shall be utilised for working capital purposes and redemption of existing financing for the Contract.

Widad Capital is also protected by restrictive covenants of the transaction - notably the prohibition of dividend payments during the tenure of the proposed Sukuk - and a tight financing structure. Beyond ensuring that the principal sum is available in the Finance Service Reserve Account (FSRA) six months before repayment, half of the principal amount would have to be set aside nine months earlier. A minimum balance equivalent to profit payments for the next six months shall also be maintained in the FSRA at all times. Meanwhile, monthly transfer of funds from the Revenue Account to the Operating Account for payment of maintenance work is based on value of work certified, thereby preventing overpayment to the subcontractor.

Widad Capital's revenue is also conditional on satisfactory performance, unlike comparable transactions in RAM's portfolio that enjoy the certainty of fixed availability charges when the construction of an asset is completed. Widad Capital is subject to the risk of termination of the Contract by the GoM should it fail to carry out its agreed obligations and to remedy any breach within a stipulated timeline. In the event of a termination, Sukuk holders will not be compensated by the Government, unlike comparable transactions in RAM's portfolio. Nevertheless, the risk of termination is mitigated by the track record in undertaking O&M work for the National Palace established by Widad Builders under a previous 3-year contract signed in 2011 although on a smaller scale, and one year of commendable performance under the Contract.

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Publication:CPI Financial
Date:Aug 23, 2016
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