Senai-Desaru Expressway Bhd - 2014

MARC has assigned a rating of BBB-IS to Senai-Desaru Expressway Berhad’s (SDEB) Islamic Medium-Term Notes (Restructured Sukuk) Programme of up to RM1.89 billion in nominal value with a stable outlook. The tenure of the Restructured Sukuk is at least 24 years and up to 39 years from the issuance date with the programme expiring before July 17, 2053. No proceeds will be raised under the Restructured Sukuk Programme. The programme will replace SDEB’s existing Senior Islamic Medium- Term Notes Programme of up to RM1.89 billion (Senior IMTN Programme) and the Junior Islamic Medium-Term Notes Programme of up to RM3.69 billion (Junior IMTN Programme), which were set to expire in June 2038.

The implementation of the Restructured Sukuk Programme follows the 15-year extension of SDEB’s concession agreement from July 2038 to July 2053 granted by the Government of Malaysia (GOM) on April 29, 2014. SDEB is the concessionaire of the 77-km inter-urban Senai-Desaru Expressway (SDE) in Johor. The project cost of the expressway of RM1.37 billion was funded through RM939 million in debt and RM430 million in equity which comprises RM25 million share capital and RM405 million irredeemable convertible unsecured loan stocks (ICULS). The SDE project had encountered several challenges that led to completion delays and significantly lower-than-forecast traffic volumes when tolling operations commenced in October 2009 (Senai-Pasir Gudang) and June 2011 (Pasir Gudang-Desaru). The underperformance of traffic flow has impacted SDEB’s cash flow generation, necessitating the restructure of its financial obligations. SDEB is a 70:30 joint-venture between Rancak Bistari Sdn Bhd, a company related to Ranhill Berhad and YPJ Holdings Sdn Bhd, a Johor state-owned entity.

The assigned rating on the Restructured Sukuk Programme considers SDEB’s improved financial flexibility arising from the programme’s longer tenure in line with the 15-year extension of the concession. In addition, the rated programme benefits from a step-up profit rate structure, ranging from 0.5% per annum (p.a.) to 14.3% p.a., that alleviates liquidity pressure in the early years of the programme and allows cash build-up before the first principal repayment in December 2038. MARC also notes that the lengthened maturity profile of the Restructured Sukuk allows SDEB to benefit from any upside in traffic volume growth from ongoing and planned developments in the catchment areas, including the Refinery and Petrochemical Integrated Development (RAPID) project, Senai Cargo Hub and Tanjung Langsat Industrial Complex. The assigned rating also considers the resolution of legal action instituted by the toll road’s contractor REPC Services Sdn Bhd (REPC) against SDEB for delays in project completion. The legal issue will be resolved through a lump sum payment of RM150 million from a loan provided by SDE Solutions Sdn Bhd, the principal repayment of which is subordinated to the Restructured Sukuk.
 
MARC views the revised assumptions used in the cash flow projection for the Restructured Sukuk to be fair given the expressway’s continued underperformance since tolling operations commenced. The base case traffic volume incorporates a 37% discount (aggregate basis) from the projected volume which was undertaken in 2012 by consultant Perunding Trafik Klasik Sdn Bhd (PTK). For 2013, SDE’s actual traffic volume, as measured by passenger car unit kilometre (pcu-km), registered a variance of 6% at 226,998,907 pcu-km against PTK’s 2012 traffic forecast of 241,503,975 pcu-km.

MARC opines that the back-ended financing structure would provide leeway for potential traffic volume growth that would enable SDEB to build a liquidity buffer to maintain compliance with the Finance Service Coverage Ratio (FSCR) covenant of 1.25 times. Under the base case cash flow projections, SDEB would be able to comfortably meet the profit payments in the first four years given the low profit rate of 0.5% p.a. or RM9.5 million p.a. SDEB’s FSCR is expected to be the lowest in financial year ending June 30, 2029 (FY2029) at 2.01 times due to a sharp increase in profit payment on the outstanding Restructured Sukuk. In MARC’s sensitivity analysis, should the projected traffic volume be reduced by 8.7% p.a. from the base case throughout the tenure of the programme, SDEB will not be able to meet its scheduled payment in FY2047. SDEB’s ability to meet its repayments also hinges on toll hike implementation. In the event when toll hikes are not permitted, government compensation payments should be received on a timely basis in order for SDEB to comply with the covenants. MARC observes although toll hikes have been deferred since 2011, SDEB has received government compensation.

MARC notes that the Restructured Sukuk also incorporates a mandatory early redemption and prepayment mechanism under which SDEB is required to pay out 95% of its cash balance subject to maintaining a minimum mandatory early redemption ratio of 2.50 times during the first five years and 1.50 times thereafter. The mechanism is structured to prepay outstanding amounts under the Restructured Sukuk Programme in reverse order with the last tranche being paid first. Although SDE Solutions Sdn Bhd is also entitled to the remaining 5% of the prepayments under this mechanism, MARC considers any prepaid amounts to have a minimal impact on SDEB’s cash flow coverage.

MARC will monitor the SDE’s performance vis-à-vis traffic forecasts and will take appropriate rating action should traffic volumes fall below expectations and/or the company faces liquidity constraints arising from delays in government compensations in lieu of toll rate hikes. 
  
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