MEX II SDN BHD - 2018 Credit Commentary Report

MEX II Sdn Bhd’s sukuk ratings have been on MARCWatch Developing since May 30, 2018. The placement follows the increased near-term uncertainty pending full clarity on the new administration’s exact plans to deliver pre-election commitments on the scrapping of toll road charges. MARC will seek to resolve the MARCWatch Developing status once there is more clarity regarding the abolition of tolls from the government. (Please see MARC’s announcement on toll roads dated May 30, 2018.)

MEX II has an existing RM1.3 billion Sukuk Murabahah Programme (Sukuk Murabahah) and a RM150 million Junior Bonds issuance (Junior Bonds). MEX II is the toll concessionaire undertaking the design, construction, operations and maintenance, toll collection and financing of the 18.0 km Lebuhraya Putrajaya-KLIA (MEX Extension), under a 33-year concession agreement with the Malaysian government. MARC observed that the project has caught up to its scheduled progress despite previous delays due to recurring heavy rainfall, design changes on a bridge and construction commencement delay on land occupied by the indigenous community. As at May 23, 2018, the physical progress stood at 53.55% against the scheduled progress of 53.50%. Nonetheless, MARC will closely monitor the construction progress and other related factors that may delay the commencement of tolling operations from the revised tolling operations date of October 1, 2019.

Based on the latest independent consulting engineer report dated June 12, 2018, the overall project cost of RM1.7 billion remains intact. As at end-April 2018, MEX II has incurred RM821.8 million on the project. Under cash flow projections, the minimum and average finance service cover ratio (FSCR) stand at 2.04 times and 2.67 times. Headroom for downside risks has been significantly reduced under MEX II’s revised project coverages due to the new tolling operations date. However, any further delay beyond 2019 or traffic underperformance of more than 10% on MEX Extension would affect MEX II’s ability in meeting its covenants. 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 financial support into MEX II via its sponsor’s undertaking in the event of a construction cost overrun.