SISTEM PENYURAIAN TRAFIK KL BARAT SDN BHD - 2016

MARC has affirmed its A+_IS and AA-_(bg) ratings on Sistem Penyuraian Trafik KL Barat Sdn Bhd’s (SPRINT) Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and Bank-Guaranteed Serial Fixed Rate Bonds (BG bonds) respectively. The outlook on the BaIDS has been revised to negative from stable, while the outlook on the BG bonds remains at stable in line with the outlook of the guarantor banks. The rating actions affect the outstanding RM458 million and RM13 million of the BaIDS and BG bonds respectively. The BG bonds are expected to be fully redeemed on July 31, 2017.

The AA-(bg) rating on the BG bonds reflects the lowest financial institution rating from MARC on the three guarantor banks of the bonds, namely Public Bank Berhad, AmInvestment Bank Berhad and RHB Bank Berhad, in line with the rating agency’s weakest link approach. MARC maintains non-solicited ratings on the three banks based on information in the public domain. The affirmed A+IS rating on the BaIDS remains premised mainly on the adequacy of SPRINT’s operational cash flows from its tolling operations to meet its debt service obligations. The negative outlook on the BaIDS incorporates weakening traffic flow on all three SPRINT links that would narrow cash flow buffers to service its debt.

Following the toll hike in October 2015, total traffic fell by 10.7% year-on-year (y-o-y) in the first ten months of 2016 (10M2016); during the period, Penchala Link was most affected with a 12.8% decline, followed by Damansara Link at 8.7% and Kerinchi Link at 10.0%. The decline led to a larger actual versus forecast average daily traffic (ADT) variance of negative 12.6% (10M2015: negative 0.9%). MARC further notes the highway’s ADT stood at 208,303 vehicles/day in 10M2016 against 233,958 vehicles/day in the previous corresponding period. Additionally, the higher quantum of toll rate hike for Class 4 vehicles (taxis) led to a drop of about 18% in traffic volume while the traffic volume of Class 5 vehicles (buses) was steady due to the toll hike exemption.

For financial year ended March 31, 2016 (FY2016), SPRINT recorded revenue growth of 15.9% y-o-y to RM240.0 million on the back of higher toll rates. Kerinchi Link and Penchala Link contributed 41.4% and 41.3% of SPRINT’s toll revenue respectively in FY2016 while Damansara Link’s contribution to tolling revenue increased to 17.3% (FY2015: 15.6%). SPRINT also recognised government compensation of RM76.7 million (FY2015: RM79.0 million). Additionally, the company further reduced its retained losses to RM416.9 million (FY2015: RM440.9 million). Cash flow from operations (CFO) improved to RM212.5 million, leading to higher CFO interest coverage of 4.99 times (FY2015: 3.13x). As at end-September 2016, cash and bank balances stood at RM262.7 million which is sufficient to cover its debt obligations amounting to RM215.2 million in FY2018. Its facility debt-to-equity, excluding the government support loans (GSL) and retained losses of SPRINT, stood at 1.48x (FY2015: 1.58x).

Notwithstanding the improved financial performance in FY2016, MARC views a further decline in the revised base case traffic volume will likely create a heavy reliance on SPRINT’s cash reserves given that the base case operational cash flow averages at RM215 million vis-à-vis financial obligations of RM213 million between FY2018 and FY2021. As at December 31, 2016, the cash reserves in the designated service revenue account stood at RM88.5 million. The ramp up of repayment is due to the commencement of the repayment of its GSL Tranche 1 from August 2016, which ranks pari passu with its other senior debts as well as the repayment of its BaIDS beginning December 2016.

While SPRINT’s cash reserves and financial covenants offer liquidity protection, MARC remains concerned over the contraction in SPRINT’s y-o-y traffic numbers in the aftermath of the October 2015 toll hikes. Current factors such as tightening consumer spending and competition from Klang Valley Mass Rapid Transit Line 1 do not seem to support an imminent recovery to pre-toll hike traffic levels.

The revised outlook indicates the increased likelihood of the rating on the BaIDS being lowered if SPRINT’s traffic volume continues to underperform its traffic forecast. Meanwhile, any changes to the rating and outlook of the BG bonds would largely be driven by changes in the credit quality of the guarantor banks.

Major Rating Factors

Strengths

• Adequate cash flow protection; and
• Financial flexibility on deferred debt service of government support loans and Redeemable Unsecured Loan Stocks issued to SPRINT Holdings.

Challenges/ Risks

• Traffic underperformance from the interlinked tolled roads;
• Competition from toll-free alternative routes;
• Significant step-up on debt service in 2017; and
• Highly leveraged capital structure.