MTD InfraPerdana Bhd - 2010

MARC has affirmed its AAID long-term rating on MTD InfraPerdana Bhd’s (MTD InfraPerdana) RM700.0 million Islamic Medium Term Notes (IMTN) programme. The rating outlook is stable. MTD InfraPerdana, a wholly-owned subsidiary of MTD Capital Berhad (MTD Capital), is an infrastructure holding company which holds interests in four toll road concessions in Malaysia and one in the Philippines. Through wholly-owned subsidiaries, MTD Prime Sdn Bhd (MTD Prime) and Metramac Corporation Sdn Bhd (Metramac), MTD InfraPerdana holds the concession for the Kuala Lumpur – Karak Highway (KLK), the East Coast Expressway Phase 1 (ECE1), the East-West Link Expressway (EWL) and the Kuala Lumpur – Seremban Expressway (KL-Seremban).

The rating reflects sustained earnings and recurring cash flow from MTD InfraPerdana’s portfolio of mostly mature toll roads which provides meaningful downside protection from adverse changes in traffic growth and toll hike approval risk. Constraining factors to the rating include the sensitivity of traffic growth to the level of economic activity, MTD InfraPerdana’s rising debt leverage and dividend payments, and the prospect of significant near-to-medium term cash outlays pertaining to its deferred consideration for a recently acquired interest in a toll expressway in the Philippines. The stable outlook could come under negative pressure if liquidity of MTD InfraPerdana weakens beyond MARC’s expectations.

MTD Prime holds a 38-year concession expiring in July 2032 for the 60km KLK and a 28-year concession on an extension of KLK, the 174.5km ECE1. KLK is the main artery linking the capital city to Karak in Pahang, while the ECE1 links Karak to the border of the east coast state of Terengganu. Both KLK and ECE1, which began operations on July 1994 and January 2005 respectively, have continued to record positive traffic volume growth in the past. Traffic volumes on the toll roads exhibit sensitivity to economic conditions. During the period under review, the KLK reported an increase in traffic volume of 6.0%, while ECE1 recorded growth of 12.0%. The growth in traffic volumes was within MTD InfraPerdana’s projections. MARC notes that there is no decision yet on ECE1’s toll rate hike due in 2010, which introduces some element of revenue and earnings uncertainty.

MTD InfraPerdana’s other toll concessionaire, Metramac, was awarded a 23-year concession for the 9km KL-Seremban Expressway that connects the Jalan Istana Interchange to the Sungai Besi Toll Plaza and the 8km EWL that connects the Cheras and Seputeh areas within the Klang Valley. The remaining life of the  concession for  both of these toll roads is  eight years. Between  April 2009 and March 2010, the KL-Seremban saw an increase in traffic volume of 1.9% attributed to the development and growth of catchment areas, including Serdang and Bangi, contributing to traffic volume growth on the highway. Traffic volume on the EWL increased by 2.8% from a low base of 101,812 pcu per day recorded in FY2009. In FY2009, some traffic from the EWL reverted to the toll-free Jalan Cheras upon construction completion of the Jalan Len Seng interchange and upgrading works on Jalan Loke Yew.

As part of MTD Capital’s corporate exercise to consolidate its toll concessions under MTD InfraPerdana, MTD InfraPerdana has entered into an agreement to acquire a 49% stake in MTD Bahrain Holding Company (MTD Bahrain) from MTD Equity Sdn Bhd, a wholly-owned subsidiary of MTD Capital. The purchase consideration of RM400.0 million will be payable over a five-year period from 2010 to 2015. MTD Bahrain indirectly holds 80% of South Luzon Tollway Corporation, which has been awarded a contract to rehabilitate and expand the South Luzon Expressway (SLEX) in the Philippines. SLEX has been collecting tolls on the rehabilitated portion of the expressway since end-May 2010 but the investment in MTD Bahrain is not expected to be accretive on a cash flow or earnings basis for MTD InfraPerdana until 2018 on the assumption that SLEX is unable to raise toll rates from current levels. The issue of the toll rate hike remains unresolved, although the Supreme Court of the Philippines recently upheld the validity of the SLEX Supplemental Toll Operation Agreement.

On a consolidated basis, MTD InfraPerdana achieved revenues of RM318.40 million in FY2010 (FY2009: RM291.54 million), of which tolls collected from the KLK contributed approximately 45% to total revenue. MTD InfraPerdana’s IMTN finance service cover ratio (FSCR) of 4.7 times (x) as at financial year ended March 31, 2009 as confirmed by independent auditors indicates comfortable headroom compared against its minimum covenanted level of 1.75x. However, MARC expects current covenant headroom to tighten as a result of the cash outlays to support its new venture in the Philippines. MTD InfraPerdana will need to manage its capital expenditures and dividends in order to maintain strong cash flow metrics. Further, MARC observes that the company’s cash flow protection measures exhibit greater vulnerability to traffic growth, toll hike approvals and cash drain risks associated with new investments in later years, as the IMTNs only begin to amortise in 2017.

MTD InfraPerdana’s gearing as measured by debt-to-equity (DE) based on the IMTN Programme terms was 1.80x as at March 31, 2009, within the covenanted level of 2.25x. MARC expects the DE ratio to be at 2.0x in FY2010, as defined under the terms of the IMTN, due to higher debt levels. Following the RM100 million drawdown under the facility in April 2010, MARC projects DE ratio to exceed 2.0x in FY2011, assuming dividend payouts remain at levels similar to the previous year. In FY2010, MTD Prime increased its borrowings level to RM120.0 million from RM20.0 million in FY2009. MARC notes that the drawdown is within the cap allowed under MTD InfraPerdana’s IMTN Programme terms.

The stable outlook on the rating reflects expectations that MTD InfraPerdana will maintain its leverage levels within covenanted terms and on the assumption that operating performance of MTD InfraPerdana’s toll concessionaires will remain supportive of dividend upstreaming, and consequently, strong cash flow coverages at the holding company level.

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