MARC Ratings has affirmed its AAA_IS(s) rating on Projek Lebuhraya Usahasama Berhad’s (PLUS) RM25.2 billion Islamic Medium-Term Notes Programme (sukuk programme) with a stable outlook. The outstanding under the programme stood at RM24.9 billion as at end-September 2023. 

The rating incorporates a two-notch rating uplift from PLUS' standalone rating of AA, based on the irrevocable and unconditional Letter of Undertaking (LoU) provided by the government through the Ministry of Finance (MoF), to cover any cash shortfall in meeting a minimum LoU finance service cover ratio (FSCR) of 2.0x on its determination date for the duration of the sukuk programme. 

PLUS’ close credit link to the government is further evident in the interdependence between the default events of the sukuk programme and its RM11.0 billion government-guaranteed sukuk (GG Sukuk), which is repayable only after the full redemption of the former. The government's golden share and significant indirect stake in PLUS, along with the importance of the North-South Expressway (NSE) in Malaysia's transportation system, further underline the rating agency’s views on the government’s support for the toll concessionaire. 

PLUS’ standalone rating reflects its matured highway portfolio, characterised by a history of stable traffic and revenue performance. Overall, traffic volume in 2022 and 7M2023 showed strong growth, increasing by 67% y-o-y (due to a sharp rebound from pandemic-induced restrictions) and 8% y-o-y over prior corresponding periods. This positive trend has translated into higher tolling revenue of RM1.9 billion (up 6% y-o-y) and broader OPBIT margin in 7M2023. MARC Ratings expects the traffic pickup to continue through 2023 but volume therefrom to return to a normalised and steady growth rate of 1.0% to 1.5% p.a., as historically seen. 

Sufficient liquidity with RM3.0 billion of cash available as at end-July 2023 as well as stable and strong cash flow generation provide PLUS with ample headroom to forecasted commitments including capex and financial obligations over the next 12 months. In terms of cash flow projections, PLUS does not anticipate drawing on the LoU to help service its obligations. It projects an average LoU FSCR of 2.93x with a minimum of 2.20x (FY2038) over the tenure of the sukuk, higher than the covenanted 2.0x. In MARC Ratings’ sensitised case, we have assumed a zero-traffic growth while all other assumptions were kept consistent with PLUS’ base case. The LoU FSCR could fall below 2.0x from year 2029 under the sensitised scenario, which would require the government to cover the cash shortfall to meet the covenant. However, as historically demonstrated, PLUS has the flexibility to delay or re-profile its capex plans as necessary to preserve financial metrics and liquidity balances. Additionally, there is also flexibility to spread the repayment schedule, all currently assumed to be within and up to 2052, to the programme’s final maturity date in 2058, coinciding with the extension of the concession period from 2038 to 2058. 

Not applicable as the rating is already at the highest level on MARC Ratings’ scale.

Downward rating pressures on the standalone rating could occur in the event of sustained traffic and cash flow underperformance beyond MARC Ratings’ expectations and/or adverse policy or regulatory changes in the toll road sector weighing on PLUS’ credit metrics.