Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd - 2010

MARC has assigned ratings of AA-IS and A- to expressway concessionaire Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd's (Kesturi) proposed new issuances of up to RM820 million Sukuk Musyarakah Medium Term Notes Programme (Senior Sukuk) and RM50 million Redeemable Junior Bonds (Junior Bonds) respectively. The outlook on both ratings is stable. The proposed issuances will be used to redeem Kesturi’s existing RM780 million Sukuk Istisna, originally raised to part-finance the construction of the 18 km Duta-Ulu Kelang Expressway (DUKE), with the remainder to fund working capital and capital expenditures. This proposed refinancing was undertaken with a view to lengthen Kesturi’s debt maturity profile and to better-match its cash flow generation abilities based on revised traffic projections of DUKE as of March 2010.

The assigned ratings and outlook reflect strong coverage of principal repayment and profit and/or coupon payments on the rated obligations provided by projected cash flow of the expressway concessionaire, the expressway’s well-positioned alignment within a service area which benefits from strong socio-economic factors and satisfactory traffic volume to date. Positioned as a direct link between east and west of the northern corridor of Kuala Lumpur, the user profile of DUKE consists mostly of commuter traffic, which is less sensitive to economic fluctuations. Constraining the ratings would be the susceptibility of Kesturi’s performance to lower-than-expected traffic volumes, traffic ramp-up and long-term traffic growth assumptions as a fairly new toll expressway. The rating on the Junior Bonds reflects its subordinated security position and subordinated priority of payment to the Senior Sukuk.

The Senior Sukuk is structured in a manner in which the principal redemptions are spread over twelve years beginning from 2018, eight years after the issuance of the facility or on the tenth year of operations. Principal redemptions on Kesturi’s current proposed repayment structure are also relatively equal in size from 2020 to 2028, which lowers its susceptibility to refinancing risk in any given year. The bullet repayment of the Junior Bond occurs in 2030, after the Senior Sukuk have been retired. Kesturi is required to maintain a finance service coverage ratio (FSCR) of at least 1.75 times (x) in respect of its Senior Sukuk and minimum FSCR of 1.25x for the Junior Bonds.

Since opening, monthly average daily traffic (ADT) on the expressway has doubled from 45,514 in May 2009 to 92,630 in July 2010. ADT decreased slightly in August 2010 to 89,122. The variance between actual ADT as of August 2010 and annual projected ADT was 5.3%. Kesturi’s cumulative negative variance was higher at 9.38% for the period covering January to August 2010. ADT is projected to  reach 94,085 at end of 2010 and to increase to 115,218 in 2012. MARC estimates that traffic volume on DUKE needs to achieve a compound annual growth rate (CAGR) of 10.7% to achieve its ADT target in 2012. Nevertheless, the revised ADT projections, which take into account an extended ramp-up period, appear to be achievable in the next one to two years. In comparison to the previous traffic study conducted by Perunding Trafik Klasik Sdn Bhd (PTK) in October 2008, current projections see a lowering of ADT by 51.9% and 6.1% in FY2010 and FY2030 respectively. MARC believes that traffic growth during the ramp-up period will come from organic growth of existing catchment areas as well as congestion at alternative toll-free routes.

Going into its second year of operations, Kesturi recorded revenue of RM40.6 million (FY2009: RM33.9 million) for the first eight months ended August 31, 2010 (8M2010) and a pre-tax loss of RM0.2 million. As at August 2010, Kesturi achieved 58.9% of toll revenue projected in FY2010. MARC estimates that toll collection will need to increase by an average of 14% monthly to achieve its FY2010 projected full-year toll revenue of RM68.9 million. Kesturi is currently generating average monthly toll collections of RM5.1 million since January 2010. Kesturi’s base case cash flow forecast projects a minimum FSCR of 2.76 times (x) and an average FSCR of 9.27x between 2011 and 2030. MARC believes Kesturi’s near-term forecast traffic levels to be reasonable, although longer term traffic numbers remain subject to greater forecast uncertainty. MARC’s sensitivity analysis on Kesturi’s projected cash flows with 15% lower-than-base-case traffic volumes for the period from 2011 through 2030 indicates the cash flow coverages continue to remain robust with minimum and average FSCRs of 2.56x and 6.93x respectively. Currently, Kesturi’s 8M2010 adjusted debt-to-equity (DE) ratio, which gives full equity credit for its redeemable preference shares, stands at 3.9x and is projected to exceed 8.0x in FY2010 (FY2009: 3.9x).

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