KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD - 2017

MARC has affirmed its AA-_IS and A- ratings on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) RM2.3 billion Sukuk Musharakah (Senior Sukuk) and RM180 million Redeemable Secured Junior Bonds (Junior Bonds) respectively with a stable outlook. The three-notch rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordination to the Senior Sukuk in regard to security ranking and payment priority.

Kesturi holds the toll concession for the 18-km Duta-Ulu Kelang Expressway (DUKE) Phase-1 and the 16-km DUKE Phase-2 until August 2059 with an option to extend for another 10 years. DUKE Phase-1 has been operational since 2009 while DUKE Phase-2 commenced full operations following the opening of Tun Razak Link and Sri Damansara Link on September 28, 2017 and October 23, 2017 respectively. The new extension is expected to improve the highway’s connectivity to western Kuala Lumpur and the city centre as well as disperse the current traffic bottlenecks on Middle Ring Road 2 (MRR2). Kesturi is 60%- and 40%-owned by Ekovest Berhad (Ekovest) via Nuzen Corporation Sdn Bhd (Nuzen Corporation) and the Employees’ Provident Fund (EPF) respectively.

The rating affirmation reflects the satisfactory traffic performance of DUKE Phase-1 and the additional traffic flow from the recently completed DUKE Phase-2. The ratings also take into account the project’s manageable debt maturity profile that is commensurate with its cash flow generation. Moderating the ratings are the highly leveraged capital structure as well as the limited capacity on DUKE Phase-1 during peak hours to accommodate future growth.

For financial year ended June 30, 2017 (FY2017), Kesturi’s tolling revenue grew to RM125.9 million due to higher toll rates. Revenue growth was, however, offset by a 0.9% y-o-y contraction in traffic volume due to longer stretches of festive holiday periods in FY2017. Due to the prolonged delay to the commencement of DUKE Phase-2, actual FY2017 traffic trailed projections by 13.7%. Operating cash flow (CFO) grew to RM107.9 million (FY2016: RM96.8 million) while CFO interest coverage was higher at 0.98 times. However, free cash flow remained negative due to partial settlement of the engineering, procurement and construction (EPC) contract sum for DUKE Phase-2. Consequently, cash and bank balances reduced to RM197.2 million as at end-June 2017.

After incorporating the delay in tolling of DUKE Phase-2, the base case projections demonstrate minimum and average combined finance service cover ratios (FSCR) with cash of 2.68 times and 7.08 times respectively. Kesturi's sensitised cases show resilience against traffic reductions of up to 7% and decreases in toll revenue of 30% from DUKE Phase-2. Excluding its cash buffer, the concessionaire can only withstand traffic growth reductions of up to 4% or increases in operations and maintenance expenses by 15% before breaking even as early as FY2025. The coupon deferral feature of the Junior Bonds, which allows unpaid coupons to be accumulated and deferred to the next scheduled payment date if the minimum Senior FSCR of 1.75 times is not met, provides some buffer should traffic performance be significantly below projections.

The stable outlook reflects MARC’s expectation of improving traffic performance that would largely be in line with projections on the back of additional traffic contribution from DUKE Phase-2. Any downward pressure on the rating could develop if the traffic ramp-up at DUKE Phase-2 is slower than expected, resulting in erosion of cash flow coverage.

Major Rating Factors

Strengths

• Easy accessibility to a wide network of major roadways;
• Long remaining life of extended concession; and
• Amortisation schedule matches debt service to project cash flows.

Challenges/Risks

• Highly leveraged capital structure;
• Peak-hour traffic bottlenecks on DUKE Phase-1 could limit future traffic growth; and
• Toll hike deferrals could weigh on project cash flows at later stage.