Zecon Toll Concessionaire Sdn Bhd - 2008 / 2009

MARC has affirmed its rating of A+ID on Zecon Toll Concessionaire Sdn Bhd’s (ZTC) RM60.0 million Bai-Bithaman Ajil Islamic Debt Securities (BaIDS), and revised the outlook on the rating to negative from stable. ZTC is the concession holder of the Tun Salahuddin Bridge, a 339-metre toll bridge over Sarawak River, located in Kuching, Sarawak’s state capital. Since the rating was last affirmed in November 2007, ZTC’s liquidity position has remained constrained on account of delay in receiving land sale proceeds from three related companies, Zecon Demak Jaya Sdn Bhd (ZDJSB), Zecon Petra Jaya Sdn Bhd (ZPJSB) and Zalpoint Tanah Putih Sdn Bhd (ZTPSB). The three related companies are wholly-owned subsidiaries of Zecon Land Sdn Bhd (ZLSB). ZTC has been relying on its cash reserves to meet its obligations under the BaIDS.

The outlook revision reflects MARC’s concern about ZTC’s short-term liquidity, particularly as cash flows generated by the toll bridge remain insufficient to cover debt service obligations. ZTC’s cash balance of RM5.04 million including balances in designated accounts as of November 30, 2008 was sufficient to meet the semi-annual profit payment of approximately RM2.64 million in December 2008. The cash balance to meet the next semi-annual profit payment of RM2.64 million in June 2009 should be sufficient as ZTC remits a monthly amount of RM440,250 into the Profit Service Account as reserves for the said payment. MARC believes that overall liquidity will continue to tighten from current levels over the next 12 months unless it is able to realise the related company receivables to satisfy its obligations. The affirmed rating reflects the toll bridge’s satisfactory traffic profile and moderate toll rate setting flexibility, offset by its heavy reliance on cash inflow from the sale of concession land as well as cash reserves/cash built-up to meet its debt service obligations. ZTC’s financial profile is presently weak for its rating category. MARC believes ZTC will be challenged to remain within compliance of its covenants if receipt of the land sale proceeds is delayed beyond 2010.

Since the opening of the toll bridge in October 2003, both traffic volume and toll revenue have been higher than the original forecast. For the financial year ended December 31, 2007 (FY2007), traffic volume grew 8.5% to 7,123,306 unit vehicles against the forecast of 6,641,818 unit vehicles. Although approval from the Sarawak state government is only required for toll rate revisions in excess of 10% every three years under the concession agreement, ZTC has maintained its toll rates at opening-year levels. The risk of potential traffic diversion to the toll-free alternative Satok Bridge, is to a large extent mitigated by congestion at the toll-free alternative route and time savings gained on use of the toll bridge.

Apart from toll revenue, ZTC is expected to rely on the sale of land alienated to the company by the state government under the concession agreement to cover its obligations under the BaIDS. In addition to the right to receive toll revenues generated by the bridge, the Sarawak state government had also alienated 2,117 acres of land adjacent to the toll bridge to ZTC as consideration for the development cost of the bridge. ZTC had sold the entire 2,117 acres of concession land for RM166.26 million to ZLSB to be used for property development, and of the sale proceeds, RM156.40 million remains outstanding. MARC has been informed that ZLSB has, in turn, disposed 500 acres of the concession land to Syarikat Perumahan Negara Berhad (SPNB), a wholly-owned subsidiary of the Ministry of Finance, and that ZLSB will be settling its outstanding receivables to ZTC through progress payments from SPNB in respect of a development project in which ZLSB has been appointed as the contractor.

In FY2007, ZTC made a pre-tax profit of RM0.76 million on the back of revenue of RM8.61 million. ZTC’s pre-tax profit and cash flow from operations net of tax (CFO) continues to be strained by its high financing costs. Although ZTC’s net cash flow from operating activities after interest and financing cost has remained negative since FY2005, ZTC has remained in compliance with its minimum required finance service coverage ratio of 1.25 times and debt-to-equity ratio cap of 2.00 times under the issue structure despite having to draw on its reserves to satisfy its debt service requirements. Delayed collections of receivables from ZDJSB, ZPJSB and ZTPSB beyond 2010 will however, put ZTC at risk of violating its financial covenants. Principal repayment for series 1 of the BaIDS of RM4.0 million will be due in July 2011.

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