KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD - 2018

MARC has affirmed its ratings of AA-_IS and A- 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). 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. The outlook on the ratings remains negative.

The ratings affirmation considers the improvement in traffic performance following the commencement of Duta Ulu-Kelang Expressway (DUKE) Phase-2 operations and the project’s manageable debt maturity profile. DUKE Phase-2 commenced full operations following the opening of Tun Razak Link (TRL) on September 28, 2017 and Sri Damansara Link (SDL) on October 23, 2017. The new extension has improved the highway’s connectivity to western Kuala Lumpur and the city centre while reducing traffic congestion on Middle Ring Road 2 (MRR2). Moderating the ratings are the highly leveraged capital structure as well as the limited capacity of DUKE Phase-1 to accommodate future growth during peak hours.

The negative outlook is mainly driven by the widening gap between the actual and projected traffic volumes in addition to declining cash reserves that have led to lower project coverage compared to initial forecast figures. The outlook also considers the concessionaire’s reliance on timely government cash compensation in the absence of periodic implementation of toll hikes. While the government had announced compensation in lieu of deferred toll hikes for 2019, MARC views this as an interim measure. Downward pressure on the ratings could develop if the traffic ramp-up at DUKE Phase-2 is slower than expected, resulting in an erosion of cash flow coverage.

In financial year ended June 30, 2018 (FY2018), Kesturi’s overall traffic volume grew by 37.8% y-o-y, mainly contributed by the opening of TRL and SDL. The spillover traffic from these two additional routes led to an annual growth of 3.0% and 10.2% at the Batu toll plaza and Sentul toll plaza. Excluding DUKE Phase-2, total traffic grew by 2.6%, dragged down by declining traffic at the Ayer Panas toll plaza. The traffic slowdown is attributed to bottlenecks at the toll plaza exit in the direction of the city centre caused by ongoing construction works along Jalan Semarak and commuters’ preference for using TRL in their daily commute to the city centre.

Notwithstanding the growth in toll revenue, Kesturi recorded its first pre-tax loss since 2014 due to higher financing cost of RM121.8 million (FY2017: RM81.7 million). The concessionaire’s cash flow from operations stood higher in FY2018 supported by better working capital management. Coupled with lower capex, Kesturi recorded a turnaround to positive free cash flow of RM59.0 million (FY2017: negative RM117.6 million). Its debt-to-equity ratio deteriorated to 10.71x on the back of higher borrowings due to the fair value increase on the Senior Sukuk and Junior Bonds.

Of more concern to the rating agency is the increasing deviation of actual traffic volumes from the forecast figures. With the exception of SDL, traffic at the toll plazas came below the projections, ranging from 10.8% to 49.7%. As a result, MARC has revised the base case traffic projections by reducing the traffic growth rates accordingly. Under this rating case scenario, Kesturi’s forward-looking Senior finance service cover ratio (FSCR) with cash averages 4.26x with a minimum coverage of 1.93x occurring in FY2025.

Excluding cash buffer, the concessionaire can only withstand further traffic growth reductions of 15% (between FY2019 and FY2023) and 5% (between FY2024 and FY2033) to break even in FY2023. Any further decline in traffic growth will likely create a heavy reliance on Kesturi’s cash reserves and government cash compensation in lieu of toll hike deferrals, as the operational cash flow averages RM208.3 million vis-à-vis debt obligations of RM181.4 million between FY2019 and FY2023.

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 could limit future traffic growth; and
• Toll hike deferrals could weigh on project cash flows at later stage.