KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD - 2015

MARC has affirmed its AA-_IS and A- ratings on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) RM2.3 billion Sukuk Musharakah (Senior Sukuk) and RM180 million Redeemable Secured Junior Bonds (Junior Bonds) respectively. The outlook on both ratings is stable. The three-notch rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordinate position to the former in respect of security and priority of payment.

The rating on the Senior Sukuk reflects primarily the satisfactory traffic performance of Kesturi’s 18-kilometre open-toll Duta-Ulu Kelang Expressway (DUKE) which connects the matured catchments at the east and west of Kuala Lumpur. The rating also considers Kesturi’s adequate progress on the construction of the 16-kilometre DUKE Phase-2 and the manageable debt maturity profile. Moderating the rating are the inherent regulatory risk in relation to toll hikes and DUKE’s limited capacity during peak hours to accommodate future growth.

The construction on DUKE Phase-2 has progressed smoothly, standing at 68.7% against the scheduled progress of 65.5% as at November 25, 2015. DUKE Phase-2 comprises two dual-carriageway three-lane links, namely the Sri Damansara and Tun Razak links, and is expected to be completed by December 2016. The construction risk is largely mitigated by the experience of turnkey contractor Ekovest Construction Sdn Bhd, which was also involved in the construction of DUKE. Furthermore, the project sponsor and ultimate holding company Ekovest Berhad (Ekovest) has provided an undertaking to fund cost overruns of up to RM60 million. MARC also draws comfort from the additional cash flow protection through the distribution covenant which restricts Kesturi from making any Junior coupon payments and shareholders’ distributions before DUKE Phase-2 commences its tolling operations.

For the first eight months of 2015 (8M2015), DUKE’s average daily traffic (ADT) grew by 6.9% to 133,334 vehicles, largely in line with the projected ADT of 132,566 vehicles. The improvement in traffic was partly due to the deferment of its toll hike which was scheduled in 2014. However, the government has allowed the 2014 toll hikes with the exception of Class 5 vehicles since October 15, 2015 which could weigh on traffic growth over the near term. MARC is also concerned on DUKE’s ability to achieve the traffic growth projections given the capacity limitations in accommodating additional traffic flow from DUKE Phase-2. In the near term, any shortfall in traffic growth would have minimal impact on the project cash flow given the undemanding finance service obligations before the first Senior Sukuk principal repayment in December 2019 and the sufficient liquidity headroom during the construction period of DUKE Phase-2.

In financial year ended June 30, 2015 (FY2015), Kesturi undertook a capital reorganisation exercise to convert its high-yield Series A redeemable preference shares (RPS) together with the accrued dividends into non-interest bearing RPS amounting to RM360.1 million. This resulted in a one-off non-operating income of RM171.8 million, leading to a reduction in Kesturi’s accumulated losses to RM195.7 million. The rating agency expects Kesturi’s profitability and leverage metrics to improve gradually with the reduction in the annual finance costs after the RPS conversion.

MARC notes that Kesturi’s project cash flows were lower than projections for FY2015 which was mainly due to the delay in compensation payments in lieu of toll hikes. Notwithstanding this, the base case minimum finance service cover ratio (FSCR) remains healthy at 3.90 times. As at October 31, 2015, Kesturi has yet to receive confirmation from the government on the receipt of approximately RM23.3 million in outstanding toll compensation for the period between January 1, 2014 and October 14, 2015. Nonetheless, MARC’s sensitivity analysis reveals that Kesturi’s debt service capability would remain adequate even if the outstanding receivables from the government are not forthcoming.

The stable outlook on the ratings reflects MARC's expectations that traffic performance on the existing DUKE would be largely in line with projections and Kesturi will continue to demonstrate satisfactory construction progress on DUKE Phase-2. Downward rating pressure could emerge if Kesturi’s liquidity position deteriorates sharply as a result of construction cost overrun.

Major Rating Factors

Strengths

• Resilient commuter-based traffic volume;
• Easy accessibility of toll road to a wide network of major roadways;
• Long remaining life of extended concession; and
• Amortisation schedule matches debt service to project cash flows.

Challenges/Risks

• Highly leveraged capital structure;
• Construction cost overruns and completion delays in relation to DUKE Phase-2;
• Peak hour traffic bottlenecks on existing DUKE could limit future traffic growth; and
• Toll hike deferrals could weigh on project cash flows at later stage.