Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd - 2009

MARC has revised its outlook on expressway concessionaire Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd's (Kesturi) RM780 million Sukuk Istisna to developing from stable. The outlook revision reflects MARC's view that the risk of events leading to a downgrade is balanced by the refinancing plan initiated by Kesturi to address a potential shortfall in debt service by October 2010. Since opening, the Duta-Ulu Kelang Expressway (DUKE) has recorded steady traffic growth, albeit below the original 2004 forecast. This is attributable to several causes, including optimistic traffic projections as well as delay in completion of the toll road and commencement of tolling, which in turn were due to delays in land acquisition by the government and approval for tolling on Section 1 of the highway. Toll revenues for fiscal 2009 are estimated to be around 57% of projections. At current levels, toll revenues are expected to be insufficient to cover Kesturi's April 2010 profit payment on the Sukuk. However, the shortfall could likely to be funded by tapping on its finance service reserve account (FSRA) maintained under the Sukuk. Management has acknowledged that the slower-than-anticipated ramp-up period will place Kesturi at greater risk of tripping covenants and debt service shortfalls, particularly when the Sukuk begins to amortise in October 2010. Kesturi is currently generating an average monthly operating cash flow of RM4.5 million since October 2009 vis-à-vis its October 2010 profit payment and Sukuk redemption of RM30 million and RM50 million respectively.
 
To address the risk of potential debt service shortfall, Kesturi is planning to issue new debt to refinance the outstanding Sukuk and is targeting financial close by end-June 2010. Although the developing outlook acknowledges that the refinancing exercise entails implementation risk, MARC believes that this is somewhat mitigated by the underlying fundamentals of DUKE which remain positive.
 
The expressway's well-positioned alignment within a service area which benefits from strong socio-economics continues to underpin its affirmed rating of A+ID. From Jalan Duta, the 18 km expressway connects to Jalan Kuching, Jalan Sentul, Jalan Pahang and Jalan Setiawangsa, and ends at the Kuala Lumpur Middle Ring Road 2 in Ulu Klang. The DUKE was partially opened in January 2009 and commenced tolling in the subsequent month. Its competitively priced tolls will only be increased after the sixth year. Since fully opening, monthly average daily traffic (ADT) on the expressway has increased from 45,514 in May 2009 to 76,899 in December 2009 against its forecast ADT of 107,160. The monthly variance in actual versus projected traffic levels for December 2009 was 28.2% while the cumulative variance was higher at  39.8%  for  the  period covering May  to December. The DUKE's current forecast assumes ADT will increase to 195,805 in 2010. MARC believes that the likelihood that actual traffic growth may  underperform  this  forecast  is  significant  and  may  challenge Kesturi's ability to maintain compliance with its covenanted debt service cover ratio of 1.50 times under the terms of the Sukuk. MARC estimates that a 35% or more negative variance for DUKE's actual versus forecast ADT in 2009 and 2010 will have adverse implications for its ability to service the rated debt.

MARC will continue to monitor the progress of the refinancing exercise to resolve the developing outlook. Failure to proceed with the refinancing plan will likely exert downward pressure on Kesturi's rating.

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