Alloy Properties Sdn Bhd - 2011

MARC has affirmed Alloy Properties Sdn Bhd’s (APSB) RM240 million Sukuk Musyarakah Medium Term Notes (IMTN) Programme rating at AAIS. Concurrently, MARC has removed APSB’s rating from MARCWatch Negative where it had been placed on August 22, 2011. The rating outlook is stable.

The rating action concludes MARC’s review of the issue rating initiated in August 2011 following the early termination of the East West Link Expressway (EWL) as well as the announced five-year freeze on toll rate increases for the Kuala Lumpur-Karak Expressway (KL-Karak) and the East Coast Expressway Phase 1 (ECE1). The review had focused on the impact of the lower forecast toll collections on KL-Karak and ECE1 on APSB’s projected cash flow debt service metrics given that cash flow from the issuer’s sister company Alloy Toll Management Sdn Bhd (ATM) is one of three identified repayment sources for the sukuk along with the assigned cash flow of another related entity Alloy Maintenance Engineering Sdn Bhd (AME) and APSB’s rental income stream.

The review also noted the pending acquisition of the aforementioned toll road concessions by a special purpose vehicle owned by MTD Capital Bhd’s group executive chairman and its president/CEO. APSB is wholly-owned by Alloy Consolidated Sdn Bhd, which in turn is a major shareholder of MTD Capital Bhd. With the completion of the acquisition of the toll concessions by ANIH Berhad (ANIH) on November 29, 2011, ANIH has replaced previous concessionaire holders of KL-Karak and ECE1 as the offtaker for ATM and AME’s outsourced toll collection, and highway operation and maintenance services, respectively.

The affirmed rating reflects MARC’s view that the impact of the lower forecasted toll collections on KL-Karak and ECE1 on APSB’s projected cash flow debt service metrics will be buffered by ANIH’s undertaking to compensate Alloy Toll Management Sdn Bhd (ATM) for the loss of revenues resulting from the freeze in toll hikes and lower revised toll rates. ATM is the entity which provides outsourced toll collection services for the  highways. Contractually entitled to 10%  of all toll  revenues collected from the KL-Karak  and ECE1,  ATM had also previously received a fixed monthly fee for toll  collection services on the EWL. The rating agency assesses the impact of revenue foregone as a result of the early termination of EWL as manageable. The affirmed rating also incorporates the narrower level of debt service coverage cushion that APSB will maintain based on October 2011 traffic forecasts by independent traffic consultant Halcrow Consultant Sdn Bhd for KL-Karak and ECE1 compared to previous forecast estimates given the sensitivity of ATM’s projected cash flow generation to changes in forecasted traffic volumes. Still, MARC expects APSB to maintain financial metrics consistent with its current rating level in the near-to-intermediate term in the absence of moderate to severe stresses to the highways’ traffic profile and any weakening of ANIH’s commitment to APSB. 

The affirmed rating also incorporates MARC’s view that the change in offtaker for ATM and AME’s services is credit neutral. That said, APSB’s rating will influenced by any transitions in ANIH’s credit profile, going forward, as any significant weakening of ANIH’s credit profile can put the combined cash flow generation capacity of ATM and AME at risk. Both entities collectively generate 70% of cash flows for the repayment of the sukuk. ANIH’s higher leverage compared to the previous concession holders, MTD Prime Sdn Bhd and Metramac Corporation Sdn Bhd is not a source of concern given its extended debt maturity profile. MARC believes that ANIH’s manageable debt maturity profile and strong internal cash flow generation should help the offtaker to maintain comfortable liquidity to meet its operational needs.

For the 12 months ended December 31, 2010 (FY2010), actual cash flows from the three identified repayment sources for the sukuk totalled RM29.1 million against projected amount of RM22.4 million. APSB, which generates rental income from its portfolio of two properties, also made lower-than-expected advances to its parent company, allowing its cash and bank balances to build up to RM31.0 million in FY2010 (FY2009: RM1,975). This is significantly higher than its projected bank balance of RM10.5 million.  Incorporating assigned cash flows from ATM and AME, actual DSCR for FY2010 was 6.73 times against projected DSCR of 2.42 times.

Based on the revised traffic forecasts, traffic volume on the KL-Karak and ECE1 is projected to increase at a lower compound annual growth rate of 3.66% and 5.49% for the KL-Karak and ECE1 respectively, down from 4.14% and 6.99% respectively, over the period from 2011 to 2019. The downward revisions in forecast traffic growth sees APSB’s average and minimum debt service coverage ratio (DSCR) declining to 2.00 times and 1.62 times respectively from original base case coverage levels of 2.06 times and 1.90 times. To the extent that projected annual DSCR without cash balance is expected to fall within the range of 0.90 times and 1.01 times from 2016 through 2019, APSB will need to conserve operating cash surpluses to satisfy its minimum debt service coverage ratio (DSCR) covenant of 1.75 times. The likelihood of tripping the DSCR covenant is high beyond 2018.

The stable outlook reflects limited rating downside in the next 12 to 18 months by APSB’s comfortable liquidity position relative to its debt service needs, the overall quality of its cash flow streams and the stable outlook for ANIH’s credit profile.

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