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Thursday, 10 December 2015

RAM Ratings assigns top rating to Wego’s proposed Sukuk

Substantial comfort is derived from a Performance Guarantee (PG) of up to RM210 million extended to the Sukuk holders by United Overseas Bank (Malaysia) Berhad (UOBM) (rated AAA/Stable/P1), effective during the construction period. Under the PG, UOBM irrevocably and unconditionally undertakes to pay the nominal value of the Proposed Sukuk following the occurrence of an Event of Default, which includes the failure to complete construction within the stipulated time frame of up to 24 months from the construction commencement date. The PG largely protects sukuk holders against the adverse effects of any construction delays, which would otherwise constraint the rating.
The preliminary rating is further supported by Wego’s superior debt-servicing ability. Backed by a predictable stream of Repayment Charges (RC) amounting to MYR 25.92 million per annum, the Company is expected to sustain strong stressed minimum and average finance service cover ratios of 1.80 times and 1.89 times, respectively, throughout the tenure of the Proposed Sukuk. The tight financing structure and restrictive covenants of the transaction as well as the absence of operating risk further minimise potential cashflow leakage. Elsewhere, counterparty risk is deemed low as the obligor of concession payments is the Perak State Government, which has a counterparty rating of AAA under RAM’s methodology for rating Malaysian state governments (published in June 2014). 
However, timeliness is a key risk factor post-completion, as Wego will rely heavily on annual concession payments from the State to meet its obligations in respect of the Proposed Sukuk. Teething problems at the initial stage of payment are common and could delay the disbursement of RCs. The transaction is also exposed to the risk of termination of the CA. Non-performance on the part of either Wego or the State will result in the termination of the transaction, which will disrupt contractual payments from the State and affect the Company’s ability to meet its obligations under the Proposed Sukuk. That said, the risk of non-performance by Wego is low as there is no requirement for operating or monitoring the schools post completion.

In addition, RAM notes the possibility of early prepayment by the State Government. Under the CA, the State Government has the option to settle concession payments ahead of the 15-year period, on a lump-sum basis. Based on our calculation, we note that the sum, which is equivalent to the present value of all future RC payments, will always be MYR 50 million more than the total outstanding principal at any point of time. In such an event, Wego is required, under the covenant, to use the entire sum to redeem the Proposed Sukuk before any payments relating to construction cost can be made.

Prior to inking the CA, Wego, a licensed contractor, had undertaken and tendered for construction jobs. Going forward, the Company will cease to take on new jobs and focus solely on the Project. Accordingly, the covenants of the Proposed Sukuk require Wego to novate all other future projects.

(C P I Financial / 09 December 2015)
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