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21 Dec | Friday
RAM Ratings assigns final AA3 rating to proposed sukuk issued by GFM Services’ funding vehicle
RAM Ratings has assigned a final AA3/stable rating to the proposed RM165 million 10.0-14.5-year tranche (proposed Sukuk) of a RM300 million Islamic MTN Programme to be issued by Dynasty Harmony Sdn Bhd (DHSB). DHSB is a wholly owned funding vehicle of GFM Services Berhad (GFM). 
 
GFM is a leading local provider of integrated facilities management and consultancy services, with an 18-year track record. On 27 November 2018, GFM acquired the entire stake in KP Mukah Development Sdn Bhd (KP Mukah) – the concessionaire for the development and maintenance of a campus for Universiti Teknologi MARA (UiTM) in Sarawak (the Project). DHSB is entirely dependent on the residual cashflow from KP Mukah (in the form of dividends), after the latter has met its obligations under a facility from Bank Pembangunan Malaysia Berhad (the Facility). The Facility had been drawn down to fund the construction of the Project. 
 
The rating reflects DHSB’s strong debt coverage, underpinned by the stable and predictable residual concession cashflow of KP Mukah. Since the Project’s completion in October 2015, KP Mukah has been receiving fixed and prompt monthly Availability Charges from a strong counterparty, i.e. the Government of Malaysia (GOM) through UiTM. Based on RAM’s cashflow analysis, DHSB is projected to register a minimum subordinated finance service cover ratio (Sub-FSCR, with cash balances and calculated in payment months) of 1.38 times throughout the tenure of the proposed Sukuk. 
 
A tight financing structure and restrictive covenants minimise potential cashflow leakages. The dividends from KP Mukah will be channelled directly to DHSB’s Revenue Account, which is solely operated by the Security Trustee. DHSB is prohibited from making any distribution to its shareholder or assuming any other loan. Several restrictive covenants will also be imposed on KP Mukah, including no additional loans and the maintenance of a minimum FSCR of 1.50 times. A custodian will be appointed to manage KP Mukah’s Operating Account opened under the Facility (which captures residual cashflow after meeting obligations under the said facility and any maintenance expense paid by UiTM in the event of non-performance by KP Mukah). In addition, KP Mukah’s key operating expenses relating to maintenance services and manpower will be fixed at certain rates under various agreements and shall not be renewed at rates higher than those acceptable to RAM.
 
That said, Sukuk holders are subordinated to the senior lender for this transaction – i.e. Bank Pembangunan, due to the lower priority of the proposed Sukuk in terms of cashflow waterfall and security. Sukuk holders will only be entitled to profit payments in the first 10 years while principal repayment will commence in December 2028, after the full redemption of the Facility. The preliminary rating is also moderated by potential interest-rate volatility arising from the variable-rate feature of the Facility, and the highly leveraged capital structure. Furthermore, the timeliness of contractual payments from the GOM is a key risk factor.
 
The transaction is also exposed to the risk of termination of the CA, which may result from KP Mukah’s failure to carry out the requisite maintenance services. In the unlikely event of a default by KP Mukah, compensation from the GOM will not cover the proposed Sukuk as it would only address the loan taken to finance the construction of the Project. 
 
 
Analytical contact
Karin Koh, CFA
(603) 7628 1174
karin@ram.com.my
 
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
 
Date of release: 20 December 2018
 
 
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.
 
Published by RAM Rating Services Berhad
Ó Copyright 2018 by RAM Rating Services Berhad
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