KUALA LUMPUR (May 29): RAM Rating Services Bhd (RAM Ratings) has upgraded its outlook on Encorp Systembilt Sdn Bhd's (Encorp Systembilt)'s RM1.575 billion sukuk murabahah to "positive" from "stable", and reaffirmed the sukuk's rating at AA2.

In a statement, RAM Ratings said Encorp Systembilt's revision is due to its expectation that the company's projected stressed minimum finance service cover ratio (FSCR) will improve further within the next two years, driven by the continuous accumulation of a cash buffer and the expectation that payments from the Malaysian government to the company will remain regular.

"The rating is supported by ESSB's robust debt-servicing ability, underscored by contractually-backed concession payments from the Malaysian government (via the Education Ministry), which have regularised since final accounts on Encorp Systembilt's additional work claims were completed eight years ago," the statement read.

"In addition, the company boasts a highly predictable cashflow coverage, underpinned by its minimal operating expenditure requirement and the absence of performance risks."

RAM Ratings said Encorp Systembilt is expected to register a stressed minimum FSCR of at least 1.41 times throughout the tenure of the sukuk.

"The integrity of the transaction is safeguarded by structural features and covenants which minimise cashflow leakage, which include limits on the company's activities and incurrence of additional debt as well as restrictions on the declaration of dividends during the tenure of the sukuk," the ratings agency said.

Additionally, Encorp Systembilt maintains an Escrow Account (as per requirements of the transaction's financing terms) that captures the monthly concession payments, operated solely by the Security Trustee and is pledged to the sukuk holders as security, it noted.

However, RAM Ratings cautioned that Encorp Systembilt's debt-servicing ability remains vulnerable to the possibility of material delays in the disbursement of concession payments, as it relies solely on these payments to service the sukuk.

RAM Ratings said the last tranche of the sukuk matures on May 18, 2028 - after the expiry of the concession on Feb 9, 2028.

"While these payments generally come in within one to two months of the invoice dates, there have previously been delays due to administrative issues. As such, the possibility of future delays cannot be entirely discounted," it added.

Otherwise, it noted that payments from the Malaysian government are contractual and sufficient for the repayment of the sukuk.

Encorp Systembilt, RAM Ratings further noted, is the concessionaire for the development of 10,000 units of teachers' quarters throughout Malaysia, based on the "build, transfer and finance" concept.

These quarters were completed in December 2003 and handed over to the Malaysian government in early 2004, in fulfilment of the company's obligations under a privatisation agreement (PA) with the former, dated Feb 9, 1998.