Malaysia MARC has removed its AA-ID rating on Maju Expressway Sdn Bhd’s (MESB) RM550 million Islamic Medium Term Notes (IMTN) Programme from MARCWatch Negative and affirmed the rating with a stable outlook. MESB holds the concession for the 26-kilometre Maju Expressway (MEX) which links the Kuala Lumpur City Centre with Putrajaya and Cyberjaya.
MARC had put MESB on negative watch on September 5, 2013, largely a result of concerns over increases in leverage stemming from parent Bright Focus Bhd’s (Bright Focus) proposed sukuk issuance of up to RM1.35 billion and potential negative implications for MESB’s credit profile.
The rating agency had extended its ongoing review of MESB’s rating as a result of outstanding information from the issuer on the highway’s traffic performance, its financial results and the status of the compensation from the government for the deferment of MEX’s scheduled 2013 toll increases. MESB has since reverted with information to address the credit risk concerns raised by the rating agency earlier.
While MARC believes that MESB’s creditworthiness would become more intricately linked to that of its parent upon the successful financial closing of Bright Focus’ proposed issuance, the rating agency has concluded that the project debt at MESB should be reasonably insulated from recent credit developments at Bright Focus in the absence of any variations to the existing issue structure of the IMTNs.
Key considerations supporting MARC’s view that MESB will remain relatively independent from Bright Focus include: 1) financial covenants under MESB’s IMTN Programme currently restrict the parent’s direct accessibility to project cash flows. However, MESB could conceivably relax the financial covenants after its parent becomes its sole noteholder; 2) the parent’s back-ended debt amortisation profile which reduces reliance on dividend distributions from MESB prior to 2020; and 3) the subordinated status of any loans and advances from the parent under the covenants of the IMTN Programme.
MESB expects the construction cost of the Seri Kembangan Interchange to be fully funded by way of subordinated shareholder advances that are repayable after the IMTN. The subordinated shareholder advances would be provided by either directly through immediate parent entity, Bright Focus or indirectly through ultimate holding company Maju Holding Sdn Bhd, or its subsidiary companies.
In the longer term, MARC envisages closer parent-subsidiary financial ties arising from MESB’s role as principal cash flow generator for Bright Focus and expected shareholder advances for the construction of the Seri Kembangan Interchange should the proposed financing at Bright Focus proceed as planned.
MARC believes that beyond the two-year time horizon that is contemplated in the current rating action and outlook, a consolidated view of the two entities which balances MESB’s intrinsic exposure to its parent against its otherwise stronger credit characteristics would be warranted. The current rating action, however, continues to be based on MARC’s evaluation of the stand-alone credit strength of the expressway project.
The affirmed rating takes into account MEX’s continuing ability to generate traffic and revenue that will support debt service coverage at levels consistent with the current rating levels. This in part depends also on timely cash compensation from the government for deferment of scheduled toll increases. Traffic growth on MEX moderated to high single digits since MARC’s last rating review; annual average daily traffic (AADT) grew 9.5 per cent in 2012 to 98,628 vehicles/day.
Benefiting from the limited potential for competing alternatives and a sizeable underlying service area, MEX’s AADT is forecast to grow at a slower rate of 6.9 per cent in 2013 to 105,445 vehicles/day according to the updated traffic study undertaken by SKM Colin Buchanan in November 2011. A steep rise in year-on-year AADT growth of 15.6 per cent is projected in 2015 with the benefit of incremental traffic generated by the new interchange.
While the new interchange introduces some degree of construction risk as well as additional traffic forecasting risks, MARC believes that the funding of the construction of the new interchange with subordinated shareholder advances should offset the downside risks posed to MESB’s noteholders by the additional leverage at MESB and construction completion to a large extent. The rating agency further notes the exclusion of debt servicing costs on the advances in MESB’s revised financial projections.
MESB posted an improved financial performance in 2012 with a pre-tax profit of RM3.1 million on the back of revenue of RM68.8 million. It maintained comfortable covenant headroom under its existing minimum 1.75 times finance service coverage ratio (FSCR) maintenance covenant with a FSCR of 3.03 times in 2012.
In light of its accumulated losses of RM58.9 million as of end-2012, MESB, which commenced tolling in 2008, is not expected to be in a position to pay dividends in the next two years. This should ensure that sufficient liquidity is built up ahead of its first principal repayment of RM50 million in 2015.
MESB’s cash and cash equivalents stood at RM72.3 million as at end-2012.
MARC understands that a request for a rating withdrawal will be made upon the successful financial closing of Bright Focus’ proposed issuance and buyback of all outstanding IMTNs with part of the proceeds of the issuance. The rating agency will monitor the rating on the IMTN Programme until the completion of the aforementioned transaction, subsequent to which the rating will be withdrawn.-- Reuters