ANIH BHD - 2016

MARC has affirmed its AA_IS rating on toll road concessionaire ANIH Berhad's (ANIH) RM2.5 billion Senior Sukuk Musharakah Programme with a stable outlook. The rating incorporates the stable traffic performance of and sufficient cash flow generation from ANIH’s portfolio of mature toll roads to support its finance service obligations. The rating also benefits from the subordinated and equity-like RM620.0 million Junior Bonds which allow ANIH to withstand stresses. Constraining the rating are ANIH’s high gearing level and significant reliance on toll hikes to maintain its financial metrics. ANIH is the concessionaire of the Kuala Lumpur-Karak Highway (KL-Karak), Phase 1 of the East Coast Expressway (ECE1) and the Kuala Lumpur-Seremban Expressway (KL-Seremban); for financial year ended March 31, 2016 (FY2016), these highways respectively contributed 47%, 43% and 10% of the company’s toll revenue.

For FY2016, the KL-Karak registered higher traffic growth of 3.1% to 116,644 passenger car units per day (pcu/day) despite the toll hike implementation in October 2015 (FY2015: 1.2%; 113,159 pcu/day). The improved traffic growth is attributable to traffic spillover from Phase 2 of the East Coast Expressway (ECE2) after it commenced commercial operations in July 2015. The direct connectivity to ECE2 from ECE1 has also enabled the latter to register stronger traffic volume growth of 7.2% to 22,375 pcu/km/day (FY2015: 3.2%; 20,876 pcu/km/day). MARC also observes that the traffic volume on the ECE1 was 6.0% above the projected volume in FY2016 which helped to offset the traffic underperformance on the KL-Karak of negative 2.5% against traffic forecasts. The highway has been affected by the prolonged closure of the Genting Highland outdoor theme park, which is scheduled to reopen at end-2017.

MARC notes that the lower-than-projected traffic volume of the KL-Seremban, which grew 3.6% to 138,784 pcu/day in FY2016 (2.1% below projections), has minimal impact on ANIH’s cash flow given the highway’s small contribution. While the KL-Karak was allowed a toll hike on October 15, 2015, the toll hike on the ECE1 has been deferred since January 1, 2015. The government provided a portion of cash compensation amounting to RM30.2 million on December 29, 2015 following the deferment.

For FY2016, ANIH’s cash flow from operations (CFO) stood at RM222.3 million and was sufficient to cover its financing service obligations of RM212.0 million during the year. ANIH’s debt-to-equity ratio improved slightly to 2.70 times following the redemption of its RM80 million senior sukuk (FY2015: 2.86 times). MARC notes that ANIH’s liquidity position remained strong on the back of ample balance sheet cash of RM357.9 million as at March 31, 2016. This was partly supported by the partial deferment of Junior Bonds profit payments and a conservative dividend distribution practice. The company’s forward-looking finance service cover ratio (FSCR) for FY2016 stood at 2.57 times, providing a comfortable margin against the covenanted FSCR of 1.75 times.

Under the base cash flow projections, ANIH’s minimum pre-distribution FSCR with cash balance stands at 2.68 times during the senior sukuk tenure. MARC’s sensitivity analysis, which incorporates significant traffic underperformance, reveals that ANIH’s debt service capacity would remain resilient only if toll hikes are implemented on the ECE1 beginning in 2017 and if remaining compensation from the government is received. If these assumptions are not met, ANIH would breach its FSCR covenant by FY2021 and face default risk in FY2023. MARC opines the risk of severe traffic underperformance to be remote, taking into consideration the highways’ long operating history and mature traffic profile. In addition, senior sukukholders can derive comfort from the restrictive FSCR covenant of 2.50 times post-distribution that helps prevent further weakening of the liquidity buffer during cash flow stress.

MARC views that ANIH would be able to service its senior sukuk obligations should the current toll rates remain unchanged with no compensation provided the highways’ traffic performance is in line with projections. However, in order to maintain cash flow metrics that are commensurate with the current rating band, the rating agency views the timeliness of monetary compensation from the government as crucial.

The stable outlook incorporates the rating agency’s expectations that ANIH would maintain its credit profile supported by stable traffic performance from its toll assets. The rating and/or outlook could face downward pressure if ANIH’s FSCR and liquidity buffer deteriorate as a result of delays in receiving toll compensations in lieu of toll hikes.

Major Rating Factors

Strengths

• Matured toll roads and stable traffic profiles;
• Loss-absorbing junior ranking debt; and
• Sound covenant package with adequate restriction on distributions.

Challenges/Risks

• Debt service coverage adequacy reliant on toll rate hikes;
• Leveraged capital structure; and
• Traffic volume susceptible to general economic activity.