MEX II SDN BHD - 2017

MARC has affirmed its AA-_IS and A- ratings on MEX II Sdn Bhd’s (MEX II) RM1.3 billion Sukuk Murabahah Programme (Sukuk Murabahah) and RM150 million Junior Bonds issuance (Junior Bonds) respectively. The outlook on the ratings is stable.

MEX II has a 33-year toll concession agreement with the Malaysian government to design, construct, operate and maintain a 16.8-km Lebuhraya Putrajaya-KLIA (MEX Extension), which is currently under the three-year construction phase. MEX Extension will begin at the existing Maju Expressway’s Putrajaya interchange and end at the Lebuhraya KLIA.

The rating on the Sukuk Murabahah reflects the satisfactory projected cash flow coverage on the back of MEX II’s non-demanding sukuk amortisation and the moderate construction risk of MEX Extension. Moderating the sukuk rating are the risks associated with timely project completion and traffic forecast. 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.

The overall progress on MEX Extension was behind schedule with physical progress standing at 17.8% against the scheduled progress of 27.3% as at January 31, 2017 due mainly to the slower-than-expected preparation of the site. The delay has led to a revised construction programme with the new toll operations date of the MEX Extension falling in October 2019 from the initial November 2018. Based on the latest independent consulting engineer report dated February 16, 2017, there have not been any changes to the overall project cost of RM1.7 billion of which the engineering, procurement and construction (EPC) sum of RM1.29 billion is fixed under the contract. The construction is being undertaken by MEX II’s ultimate parent Maju Holdings Sdn Bhd (Maju Holdings) which was also the contractor of the existing Maju Expressway. MEX II has incurred RM521.6 million on the project as at end-January 2017.

Notwithstanding the revised tolling operations date, MARC views that the project metrics remain appropriate at the current rating level. The minimum and average senior finance service cover ratio (FSCR) under the latest cash flow projections are 2.18 times and 2.77 times throughout the financing tenure. MARC also notes that currently the contingency buffer and the absence of sukuk repayment during the early part of the sukuk tenure mitigate the impact from project delay. The anticipated cash balance of RM105.1 million on the first tolling operations date is sufficient to cover two semi-annual profit payments on the sukuk.

MARC’s sensitivity analysis, however, indicates a limited headroom for downside risks under MEX II’s revised project coverages under the new tolling operating date. Any further delay beyond 2019 or traffic underperformance of more than 10% on the MEX Extension would exert pressure on the ratings on the Senior Sukuk and Junior Bonds. The rating agency considers the subordinated Junior Bonds and its deferral profit payment feature as strong structural protection against cash flow stresses, particularly during the construction period. MARC also expects Maju Holdings to inject equity/cash into MEX II via its sponsor’s undertaking in the event of a construction cost overrun.

The stable outlook reflects MARC’s expectation that construction of the MEX Extension will progress in accordance with the revised schedule and the project cost will remain within budget. MARC would revise the outlook should there be further delays in the project which would result in a significant weakening of MEX II’s project cash flow coverage.

Major Rating Factors

Strengths

• Direct connectivity from Kuala Lumpur city centre 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.