MARC has downgraded the long-term rating of Sistem Lingkaran-Lebuhraya Kajang Sdn Bhd’s (SILK) Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) to B-ID from BB-ID previously. The steep downgrade follows from the continuous weak traffic volume at all the four tolls which remained below the revised traffic projections since 2006 (the latest traffic study dated August 2005 was undertaken by Perunding Trafik Klasik Sdn Bhd (PTK)) and what appears to be the inability on the part of Sunway Holdings Incorporated Berhad (SunInc) to honour its earlier commitment to provide debt service support for the SILK bonds.

The developing outlook is premised on the proposals recently announced by Sunway Infrastructure Berhad (SIB), the shareholders of SILK. SIB announced that it has proposed a cash settlement of RM740 million to the BaIDS holders as full and final settlement to all SIB’s liabilities and obligations under the outstanding BaIDS. The proposed settlement is conditional upon the approvals of amongst others, the BAIDSholders, all relevant regulatory authorities, the Government of Malaysia (GOM) pursuant to the Concession Agreement between GOM and SILK, shareholders of SIB, shareholders of SunInc, and the preference shareholders of SIB.

Given the poor projected toll revenue, SILK’s cashflow coverage is projected to be insufficient to redeem the BaIDS. The first redemption of RM150.0 million is due in August 2007. As at end August 2006, SILK has deposited the first 50% of the debt service amounting to RM75.0 million into the Debt Service Reserve Account (DSRA). Whilst MARC had highlighted in its last review that SILK has the capacity to meet this 50% payment, additional equity/loan financing or refinancing/restructuring of the current BaIDS is necessary for SILK to fulfill its remaining debt obligations.

SunInc had earlier provided an undertaking to ensure that SILK maintains a Debt Service Cover Ratio of 1.25 times and that the required balances are in the DSRA. Initially viewed as a risk mitigant should the project perform below expectations, this risk mitigation has proved to be ineffective because of the evidently escalating cost of potential support. The latter, was a consequence of traffic volumes which have turned out to be vastly different from original assumptions and expectations. The enforceability of this undertaking is in doubt since SILK is a Related Party of SunInc; and hence, SunInc might be obliged to first seek shareholders’ approval before providing any financial assistance pursuant to the undertaking.

The 37-km long Ring Road is located in Kajang and circumscribes the township of Kajang, facilitating the bypass route to Cheras and Bangi. It was fully completed in December 2004 and three tolls, Bukit Kajang, Sungai Ramal and Sungai Balak have been opened for tolling since July 2004 whilst the Sungai Long toll commenced operations in January 2005. Since opening, the actual traffic volume has consistently been below the initial projections.

Due to the significant deviation between the traffic volume projected by the previous consultants and the actual traffic registered on the Ring Road since tolling, SILK engaged another traffic consultant, PTK to review the existing pattern and forecast future travel demand along the highway. PTK has identified a few problems faced by SILK, including the high number of alternative non-tolled routes; the higher volume of traffic moving towards the town area; the slower than expected proposed developments surrounding the Ring Road and the location of the toll booths which are not located on stretches with the highest volumes.

Actual traffic volume recorded for the year 2005 was 22,834,908 vehicles or an average of 62,561 vehicles per day. The actual traffic volume recorded from mid-January 2005 up to mid-August 2005 was 12,431,321 vehicles; 74.9% lower than the earlier projections of 49,533,164 vehicles. The actual traffic volume recorded from mid-August 2005 up to mid-January 2006 was 10,403,587 vehicles; slightly higher than the revised projections of 10,018,841 vehicles during this period. In year 2006, cumulative traffic up till April 2006 showed a slight dip of 9.0% from the revised traffic forecast given the effects of the fuel hikes early in the year. The actual traffic volume recorded for this period was 6,454,834 vehicles as against the revised traffic forecast of 7,092,270 vehicles.

Based on PTK’s base case traffic assumptions and the toll rate increments scheduled in the Supplemental Concession Agreement, the company’s funds would be insufficient to cover the BaIDS redemption. Also, as SILK is expected to carry the accumulated losses throughout the tenure of the BaIDS, its debt leverage position will gradually increase in the absence of additional equity injection. A BaIDSholders steering committee has been formally set up in June 2006 to oversee a restructuring proposal and the committee has appointed a financial advisor to assist with a restructuring/refinancing scheme.