PROJEK LEBUHRAYA USAHASAMA BERHAD - 2016

MARC has affirmed its AAA_IS rating on Projek Lebuhraya Usahasama Berhad's (PLUS) RM23.35 billion Sukuk Musharakah Programme (sukuk) with a stable outlook. PLUS is the toll concessionaire of five major highways in Malaysia, of which the 772-kilometre (km) North-South Expressway (NSE) is its key highway in terms of revenue generation.

The rating affirmation continues to incorporate a two-notch rating uplift from PLUS’ standalone rating of AA on the basis of support assumption from the Malaysian government with respect to the sukuk. Among the key factors supporting this assumption are the interdependence between default events for the rated sukuk and the RM11.0 billion government-guaranteed sukuk (GG Sukuk) maturing after the rated programme. In addition, MARC considers the government’s golden share and indirect major shareholding in PLUS as well as the critical role of the NSE in the country’s transportation system as factors underpinning the rating uplift. PLUS is jointly owned by UEM Group Berhad, a wholly owned subsidiary of Khazanah Nasional Berhad, and the Employees Provident Fund Board.

PLUS’ standalone rating is premised on its satisfactory cash flow coverages on the back of stable traffic performance of its portfolio of matured highways comprising the New Klang Valley Expressway (NKVE) and the NSE, the North-South Expressway Central Link (NSECL), the Malaysia-Singapore Second Link (MSSL), the Butterworth-Kulim Expressway (BKE) and the Penang Bridge. Moderating the rating is PLUS’ high gearing level and the potential impact on traffic volume from new highways and alternative transportation modes.

For the first nine months of 2016 (9M2016), the NSE registered a moderate 4.4% growth in traffic volume to 13.4 billion passenger car unit-kilometres (PCU-km) while the NKVE recorded a strong growth of 8.1% to 2.3 billion PCU-km, mainly supported by growing commuters in north-west Klang Valley. The MSSL also showed a marked improvement of 8.5% growth during the period, attributable to the new developments surrounding Nusajaya and improved connectivity to west Johor Bahru via Gelang Patah. Meanwhile, the NSECL grew 8.6% in traffic volume in 9M2016, despite the competition from the new Light Rail Transit (LRT) extension to Putra Heights. However, both Penang Bridge and BKE registered minimal traffic growth given that the highways are already mature.

For 9M2016, PLUS recorded a revenue of RM2.96 billion, which included the recognition of toll compensation from the government amounting to RM268.7 million due to the deferment of the scheduled toll hike on 1 January 2016. The company’s net operating cash flow of RM1.99 billion (9M2015: RM1.95 billion) was sufficient to cover its debt service obligations of RM1.54 billion. PLUS’ finance service coverage ratio (FSCR) post-coupon payment on its redeemable convertible unsecured loan stock (RCULS) of RM720 million remained adequate with estimated ending cash balance of RM2.3 billion at end-2016. However, the company’s gearing level further deteriorated on the back of high accumulated losses due to higher amortisation charges on concession assets and substantial financing costs and coupon payments on the RCULS. PLUS redeemed its first principal repayment of RM200 million in January 2017.

PLUS’ pre-distribution FSCR would remain adequate under the revised base case cash flow projection. The base case assumes that PLUS will receive compensations from the government in a timely manner in lieu of a toll hike deferral. The sensitivity analysis shows PLUS’ cash flow is more susceptible to substantial traffic underperformance relative to a delay in receipts of government compensation throughout the concession period. While the risk of significant traffic underperformance is viewed to be remote, prolonged delays in toll rate increases as per the concession agreement coupled with the absence of government compensation throughout the concession period will result in an FSCR of below 2.00 times (x) in 2026.

The stable outlook is premised on MARC’s expectations that the concession assets of PLUS will continue to achieve satisfactory traffic performance that is in line with projections and the company’s credit metrics will remain commensurate with its standalone rating.

Major Rating Factors

Strengths

• Portfolio of matured toll road concessions with stable traffic profiles;
• Government support to the transaction, and;
• Stature of shareholders.

Challenges/ Risks

• Highly leveraged transaction structure;
• Threats from upcoming alternate tolled roads and rail networks, and;
• Inherent regulatory risks.