MEX II SDN BHD - 2016

MARC has assigned AA-_IS and A- ratings to special purpose company MEX II Sdn Bhd’s (MEX II) proposed RM1.3 billion Sukuk Murabahah Programme (Sukuk Murabahah) and RM150 million Junior Bonds issuance (Junior Bonds). The outlook on the ratings is stable. The three-notch rating differential between the Sukuk Murabahah and Junior Bonds reflects the latter’s subordinated position, its deferred profit payment risk and its non-amortising repayment profile.

MEX II is the toll concessionaire undertaking the design, construction, operation, maintenance, toll collection and financing of the 16.8-kilometre Lebuhraya Putrajaya-KLIA (MEX Extension) under a 33-year concession agreement with the Malaysian government. The estimated project cost (construction cost and interest during construction) of RM1.48 billion will be mainly funded by the proceeds from the Sukuk Murabahah and Junior Bonds issuances under a proposed debt and equity mix of 81:19 with the Junior Bonds given 50%-equity credit based on MARC’s methodology on equity credit for subordinated debt.

The rating on the proposed Sukuk Murabahah reflects MARC’s expectations that MEX II’s debt obligations will be adequately met by the cash flow generated by the anticipated traffic flow on the MEX Extension, an open-toll three-lane dual carriageway expressway commencing from the Putrajaya exit of the existing 26-kilometre (km) Maju Expressway (MEX) and ending about 6km from Kuala Lumpur International Airport (KLIA). The traffic forecast considers that upon completion, the MEX Extension via MEX would be the shortest alternative to the country’s international airports from KL city. The rating also factors in the fixed sum construction contract which mitigates construction risk as well as the financing structure which provides sukukholders with adequate protection against financial and performance stresses. The ratings are moderated by typical risks associated with a project of this nature, namely project completion, traffic performance and government compensation payment.

MARC notes that the toll concessionaire’s parent company and project sponsor Maju Holdings Sdn Bhd (Maju Holdings) will undertake the construction which is scheduled to be completed within 36 months with tolling operations targeted to commence in November 2018. MARC views Maju Holdings’ past track record in road works and infrastructure construction, including the timely completion and delivery of the MEX project, to mitigate construction risk. In addition, the project sponsor will provide an undertaking to address any construction cost overruns. Further comfort is drawn from the liquidated and ascertained damages arrangement under the turnkey contract and the pre-funded finance service of six months which provides buffer for loss of toll revenue and cash flow mismatch arising from any project delay. The MEX Extension project is also not likely to face land acquisition issues given that the land for the extension was fully acquired by the government and gazetted on April 27, 2000.

As the MEX Extension is aligned with the existing MEX at its Putrajaya toll plaza, the former is likely to capture a portion of the latter’s traffic flows. The traffic capture rate is assumed at between 47% and 61%, indicating that the MEX Extension is likely to face a shorter ramp-up period of three years as compared to other MARC-rated greenfield toll road concessions . According to a traffic study by Jacobs Engineering Group Malaysia Sdn Bhd, the MEX Extension is expected to achieve an average daily traffic (ADT) of 43,183 in the first operating year with an annual compounded traffic growth of 3.9% throughout the financing tenure. MARC considers the traffic performance to be sensitive to toll increases which are scheduled every five operating years given that the users will comprise mainly non-commuters. While MEX II is entitled to government toll compensation in the event of toll hike deferments, the compensation is capped by the projected toll revenue in the concession agreement. MARC opines that this compensation structure would limit any potential upside in the project cash flow coverage levels.

MEX II’s cash flow projects a minimum and average base case forward-looking Senior finance service cover ratio (FSCR) of 3.09 times and 4.06 times during the financing tenure. MARC’s sensitivity analyses reveal a moderate degree of resilience with respect to FSCR levels on assumptions of completion delays and traffic underperformance. The company’s cash buffer of RM169.9 million post-completion of construction work is sufficient to cover four semi-annual profit payments on the sukuk. MEX II’s project cash flow would be able to withstand up to a 25.5% reduction in projected traffic volume before breaching the covenanted Senior FSCR of 1.75 times in 2024. The cash flow coverage will also remain adequate if the scheduled toll hike and cash compensation are deferred by two years. MARC considers the subordinated Junior Bonds and its deferral profit payment feature as strong structural protection against cash flow stresses. The sukukholders are also protected against excessive cash leakages by the requirement to maintain a post-distribution Senior FSCR of 2.00 times.

The stable outlook underpins MARC’s expectation that the project sponsor will adhere to the pre-determined capital commitment under the financing structure and the construction of the MEX Extension will progress in line with the schedule and budget.

Major Rating Factors

Strengths

• Direct connectivity from Kuala Lumpur city to Kuala Lumpur international airports;
• Traffic volume visibility based on existing traffic at Maju Expressway’s Putrajaya toll exit; and
• Debt amortisation that matches the anticipated ramp-up in project cash flows.

Challenges/Risks

• Construction cost overruns and completion delays;
• Competition from alternative routes; and
• Potential toll hike deferrals and delays in receipt of government compensation.