MARC Ratings has assigned a rating of AAA_IS(s) to Projek Lebuhraya Usahasama Berhad’s (PLUS) proposed Islamic Medium-Term Notes Programme of up to RM25.2 billion (IMTN). Concurrently, the rating agency has also affirmed its AAA_IS rating on PLUS’ outstanding RM17.2 billion under the Sukuk Musharakah Programme (Sukuk Musharakah). All ratings carry a stable outlook. 

Of the proposed IMTN, RM17.2 billion will be exchanged with the existing RM17.2 billion Sukuk Musharakah. MARC Ratings does not view the substitution as a distressed exchange as there is no change to terms (such as nominal amount, profit rates, profit payment dates and maturity dates) compared with the original contractual terms. The rating on the Sukuk Musharakah programme will be withdrawn upon completion of the exchange and its cancellation thereof. The balance of the proceeds of RM8.0 billion will be used for a one-off distribution to ultimate shareholders Khazanah Nasional Berhad via UEM Group Berhad and the Employees Provident Fund (EPF).

The proposed IMTN pertains to PLUS’ Proposed Toll Restructuring that arose from the following events:

Under the current scheme of arrangement with the government, there will be a freeze on toll hikes on all PLUS’ highways and there will be no further government compensation from January 1, 2022 apart from the overdue RM2.3 billion up to December 31, 2021 that is to be paid over five instalments between 2023-2027. 

The rating for the proposed IMTN continues to incorporate a two-notch rating uplift from PLUS’ standalone rating of AA, which reflects its very strong ties with the government. This is underscored by an irrevocable and unconditional Letter of Undertaking from the Government of Malaysia via the Ministry of Finance (MoF) to top up any cash shortfall such that PLUS’ finance service cover ratio (FSCR) will be at a minimum 2.0x throughout the tenure of the proposed IMTN. The undertaking includes a delineated timeline for liquidity support and illustrates government support to mitigate financial risks, if necessary. PLUS’ credit linkage to the government is also evidenced by the interdependence between the default events for the proposed IMTN and the RM11.0 billion government-guaranteed sukuk (GG Sukuk) which can only be fully redeemed after the proposed IMTN. The government’s golden share and indirect major shareholding in PLUS, as well as the company’s NSE’s critical role in the country’s transportation system, further underpin our view that PLUS has a high probability of receiving support from the government.

Nevertheless, in PLUS’ base case cash flow projections, which assume historical average traffic growth and operating margins, the company does not foresee the need to draw on the letter of undertaking as its minimum and average FSCRs are at 2.10x and 2.80x. The laddered amortisation schedule of the proposed IMTN and some refinancing of sukuk tranches at maturity partly explain the comfortable metrics. With respect to refinancing, PLUS’ government-linked status, established track record and high cash flow visibility provide solid access to capital markets, while well-spaced maturities also offer strong refinancing ability.  

In MARC Ratings’ sensitivity analysis that assumes no traffic growth and all else being equal, the FSCR falls below 2.0x from year 2029 and would require the government to top the cash shortfall to meet the FSCR covenant. However, as the company has demonstrated in the past, it has significant flexibility to delay or re-profile its capex plan as necessary to preserve healthy financial metrics and liquidity balances. There is also flexibility to spread the repayment schedule, all currently assumed within and up to 2052, to the programme’s final maturity date in 2058.  

PLUS’ total debt will increase from RM28.2 billion to a peak of around RM36 billion in 2023 upon the completion of the proposed toll restructuring. The debt profile is, however, long dated and fully amortising, with well-distributed maturities, rendering debt servicing manageable. PLUS has a strong operating profile with well-established levels of traffic volume, generating operating cash flow of about RM2.1 billion p.a. that would allow for organic deleveraging.

The mechanics of the proposed transaction, however, will lead to the creation of an asset on PLUS’ balance sheet in the form of an amount owing from holding company, PLUS Malaysia Berhad (PMB), repayment of which will depend on the parent’s cash flow generating ability. PMB relies largely on coupon payments from the Redeemable Convertible Unsecured Loans Stocks (RCULS) it subscribed from PLUS; however, the terms of the proposed IMTN restrict PLUS from making such payments to PMB until and including 2038. This may potentially lead to an impairment and/or write-off of the amount owing, and a widening of PLUS’ negative shareholders’ funds as a result.

The potential impairment/accounting adjustment as well as its lofty depreciation and amortisation are non-cash in nature, with no material impact on the company’s business fundamentals and debt service ability. PLUS’ underlying cash flows and economic risks remain unaffected and we continue to view PLUS’ solid business risk profile, robust cash flows and strong financial flexibility favourably. We take further comfort in the availability of cash flow support from the government, if necessary.  

PLUS’ expressway system has since recovered from the pandemic declines with current traffic at the NSE, New Klang Valley Expressway (NKVE), Penang Bridge and Butterworth-Kulim Expressway (BKE) surpassing pre-pandemic levels. Traffic at North-South Expressway Central Link (ELITE) and Linkedua through September 2022 also indicates a near-full recovery (92%-95%) from the pandemic. In terms of liquidity, as of end-July 2022, PLUS had RM2.33 billion in available cash. 

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

There could be downward rating pressures in the event of a sustained traffic and cash flow underperformance beyond our expectations and/or adverse policy or regulatory changes in the toll road sector weighing on PLUS’ credit metrics.