PROJEK LINTASAN SUNGAI BESI – ULU KLANG SDN BHD - 2017

MARC has assigned its rating of A+_IS(s) to single-purpose company Projek Lintasan Sungai Besi-Ulu Klang Sdn Bhd’s (PLSUKE) Sukuk Wakalah Programme (Sukuk Wakalah) of up to RM2.0 billion. Concurrently, MARC has also assigned its rating of AAA_IS(fg) to PLSUKE’s proposed Danajamin-Guaranteed Facilities (Danajamin-Guaranteed Sukuk) of up to RM500.0 million (collectively the “Sukuk Programmes”). The outlook on both ratings is stable.

PLSUKE is wholly owned by Projek Lintasan Kota Holdings Sdn Bhd (PROLINTAS) which in turn is 100%-owned by Permodalan Nasional Berhad (PNB), a government-linked investment company. PLSUKE is undertaking the design, construction, operations, maintenance, toll collection and financing of the Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) under a concession agreement (CA) with the Malaysian government (GOM). The concession tenure is 55 years starting from December 25, 2014 with a conditional extension of another 10 years. The project cost is estimated at RM7.55 billion with a 79:21 debt-equity ratio and the construction period runs over 48 months with tolling operations commencing on September 1, 2020. The financing comprises proceeds raised under the (i) Sukuk Programmes; (ii) Syndicated Islamic Term Facilities (SITF) of up to RM2.2 billion and (iii) Government Support Financing (GSF) of up to RM1.778 billion, all of which are ranked pari passu in terms of priority of payment and security (save and except for several identified designated accounts).

The assigned rating on the Sukuk Wakalah is underpinned by credit substitution from PROLINTAS in the form of (i) an unconditional and irrevocable corporate guarantee to meet all principal and profit payments under the Sukuk Programmes, SITF (collectively referred to as “Senior Facilities”) and GSF as well as to fund any shortfall in the finance service reserve account (FSRA) and/or finance payment account (FPA); and (ii) an unconditional and irrevocable completion guarantee during the construction period to fund any project cost overruns in addition to meeting any shortfall in the initial prefunding of the FSRA on the scheduled project completion date and any shortfall in the FPA. MARC has incorporated a one-notch rating uplift from PROLINTAS’ standalone rating based on parental support from PNB which continues to be evident in the periodic equity injections into the subsidiary. The rating agency regards PNB as the ultimate project sponsor for the SUKE project for which it will provide the equity portion amounting up to RM1.57 billion via PROLINTAS’ subscription of shares in PLSUKE.

MARC’s approach to rating PLSUKE differs from other toll-road projects in its rating universe given that PLSUKE’s financing structure is not characteristic of typical project financing. The Senior Facilities of up to RM4.7 billion are non-amortising and are expected to be refinanced through new facilities upon their maturity in 2027, about seven years after completion of construction. The time frame is deemed insufficient to generate project cash flows to meet financial obligations with the issuer heavily reliant on pre-funded cash balances to service the profit on the Senior Facilities during the tenure of the facilities. As a result, PLSUKE will face significant refinancing risk which MARC believes is effectively transferred to project sponsor PROLINTAS by virtue of the corporate guarantee.

PROLINTAS’ standalone credit rating takes into consideration its track record as one of the leading domestic highway developers and operator of four matured highways that to some extent, mitigates the significant construction and completion risk associated with SUKE as well as the upcoming 20.1-km Damansara-Shah Alam Elevated Expressway (DASH) project concurrently being undertaken by PLSUKE’s sister company. Weighing on the rating is PROLINTAS’ highly leveraged capital structure which constrains the group’s profitability and cash flow metrics. MARC views SUKE’s construction cost estimates to be materially higher than most domestic toll road projects, although this has been largely attributed to the fact that the dual three-lane expressway is approximately 90.0% elevated.

MARC views the project’s construction schedule as reasonable to manage construction and completion risks. Any protracted delay arising from land acquisition issues is deemed low and an adequate time frame has been set aside for this process. As at September 27, 2017, PLSUKE acquired 76.09% of the project site; the remaining project land measuring 77.05 hectares is expected to be completed by November 2018. The cost overrun risk is mainly mitigated by the fixed price contract dated September 15, 2016 with turnkey developer Turnpike Synergy Sdn Bhd (TPS), which is wholly owned by PROLINTAS and was also involved in two of its parent’s completed highway projects. In addition, the construction risks are further addressed by PROLINTAS’ completion guarantee.

Based on a traffic study by Perunding Trafik Klasik Sdn Bhd (PTK), SUKE will have a commuter-oriented traffic base and function mainly as an alternative route to Middle Ring Road 2 (MRR2), serving commuters traversing the north-south section of the Klang Valley direction to bypass MRR2 at the Sungai Besi, Cheras and Ampang areas. The expressway is expected to benefit from connectivity to key transport corridors in the Klang Valley and growth prospects in the Cheras and Ampang areas. Nonetheless, the traffic forecast assumption that 25% to 30% of total traffic will be from commuters making their full journey on SUKE with an aim to bypass MRR2 may be an overestimation as MRR2 is toll free and congestion occurs mainly during peak hours only.

MARC has sensitised PLSUKE’s base case cash flow projection and noted that it is able to withstand moderate stress without affecting its ability to service the Senior Facilities and GSF, aided by sizeable pre-funded cash reserves of RM1.055 billion at the start of operations. PLSUKE is required to pay a nominal amount annually on the GSF prior to a balloon repayment in 2046. On assuming significant traffic underperformance (of 40% lower than the base case), cash flow coverage will remain adequate due to the absence of early prepayments on the GSF. The base case cash flow projections assume excess revenue generation will be utilised for GSF prepayments of RM264.9 million during the tenure of the Sukuk Programmes. MARC highlights that significant downside traffic stress would exert pressure on PROLINTAS’ credit quality and consequently affect the company’s ability to seek refinancing on the Senior Facilities.

The stable outlook on the Sukuk Wakalah is based on the assumptions that (i) PROLINTAS will maintain a satisfactory credit profile and receive continued support from PNB and (ii) construction of SUKE will progress in line with schedule and budget. The rating and outlook on the Danajamin-Guaranteed Sukuk reflect MARC’s insurer financial strength rating of AAA/Stable on Danajamin Nasional Berhad (Danajamin).

Major Rating Factors

Strengths

• Completion and corporate guarantees from project sponsor;
• Commitment from ultimate parent to provide equity funding;
• Direct connectivity to major highways in the Klang Valley; and
• Long-tenured concession.

Challenges/Risks

• Significant refinancing risk due to balloon repayment in 2027;
• Construction cost overruns and completion delay;
• Impact on toll revenue if traffic spillover from existing toll-free roads is lower-than-expected; and
• Potential toll hike deferrals and delays in receipt of government compensation.