LEBUHRAYA DUKE FASA 3 SDN BHD - 2017

MARC has affirmed its rating of AA-_IS on toll concessionaire Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah with a stable outlook.

DUKE 3, a wholly-owned subsidiary of Ekovest Berhad (Ekovest), is undertaking the design, construction, financing, operations and maintenance of the 32.1km DUKE Phase 3 expressway in Kuala Lumpur. The expressway, which will connect the Middle Ring Road 2 at Wangsa Maju to the Kerinchi Link adjoining the Federal Highway, is being built under a concession agreement (CA) with the Malaysian government ending August 5, 2069.

The rating affirmation factors in the sufficient progress made on the construction and the adequately structured sukuk repayment profile that accommodates the traffic ramp-up of the DUKE Phase 3 expressway. Moderating the rating are project completion and traffic demand risks as well as regulatory risk in relation to toll hikes. Project construction risk is largely mitigated by the reasonable 42-month construction timeline and the relevant experience of turnkey contractor Ekovest. While the overall progress of the DUKE Phase 3 expressway, which stood at 3.32% as at end-June 2017 is behind scheduled progress of 7.00% due to delays in highway design works, the targeted completion date remains on December 31, 2019. The progress shortfall is expected to be narrowed given that the delay can be addressed with additional manpower during the structural works. However, should there be cost arising from any delays, it would be passed to the contractor through the back-to-back liquidated ascertained damages (LAD) arrangement under the fixed-sum contract.

In respect of land required for construction of the expressway, DUKE 3 has access to 96.5% of the 553.3 acres; of the balance of 19.6 acres, 6.9 acres, comprising 13 factory lots, are in the Chan Sow Lin area. DUKE 3 is expected to have access to this land after the compulsory acquisition hearing in September 2017. As a sizeable government funding of up to RM350 million has been set aside for land purchases, financial risk associated to land acquisition is minimised.

As at July 31, 2017, DUKE 3 has incurred RM751 million on the project to-date with a remaining cash balance of RM3.8 billion in its designated accounts. While DUKE 3 has fulfilled the conditions precedent for the drawdown of reimbursable interest assistance (RIA), DUKE 3 has only received its first scheduled RIA payment of RM100 million from the government in July 2017. The disbursement of RM100 million, RM250 million and RM210 million in RIA was originally scheduled for 2016, 2017 and 1Q2018 respectively.

If the remaining RIA payments are not forthcoming by end-2018, DUKE 3 would face difficulty in meeting its payment milestones for the project in 2019. The total project cost for the DUKE Phase 3 expressway is estimated at RM5.0 billion.

DUKE 3’s projected minimum and average pre-distribution finance service cover ratio (FSCR) with cash balance of 2.23 times and 2.46 times respectively during the sukuk tenure have been unchanged since the rating was first assigned. The sensitivity analysis indicates that the project cash flow can withstand up to 11% construction cover overrun or up to 12 months’ delay in the tolling operations date before breaching the FSCR covenant of 1.50 times in 2023 and 2026 respectively. Under these scenarios, DUKE is also vulnerable to a breach in the equity-to-capital ratio of 16% in 2024. MARC’s breakeven analysis shows toll revenue post ramp-up period (the first four years of its commercial operations) would have to demonstrate annual growth of at least 5.9% against 3.8% of operating expense growth to breakeven. The breakeven growth rate would increase to 7.3% per annum in the event that the initial traffic growth during the ramp-up period hovers around 23% (against the projected 26%).

The stable outlook incorporates MARC’s expectation that the construction of the DUKE Phase 3 expressway will be largely on schedule and within budget. Downward pressure may arise if DUKE 3 experiences a liquidity crunch due to a protracted delay in disbursement of the RIA from the government.

Major Rating Factors

Strengths

• Well-positioned alignment within mature catchment areas;
• Accessibility to a network of major roadways;
• Debt amortisation that matches project cash flows; and
• Long-dated concession tenure.

Challenges/Risks

• Moderate debt protection measures for the sukuk;
• Construction cost overruns and completion delay; and
• Risk of toll hike deferrals and delays in receipt of government compensation.