MARC has affirmed its ratings of AA-_IS and A- on toll concessionaire MEX II Sdn Bhd’s (MEX II) RM1.3 billion Sukuk Murabahah Programme (Sukuk Murabahah) and RM150 million Junior Bonds issuance (Junior Bonds). The three-notch rating differential between the Sukuk Murabahah and Junior Bonds reflects the latter’s subordinated position, its deferred profit payment risk and its non-amortising repayment profile. The ratings outlook remains negative. 

MEX II is undertaking the design, construction, operations and maintenance, toll collection and financing of the 16.8-km Lebuhraya Putrajaya-KLIA (MEX Extension) that will begin at the Putrajaya interchange on the existing MEX and end at Lebuhraya KLIA. The project is under a 33-year concession agreement with the Malaysian government. The affirmed ratings mainly incorporate the accommodative repayment schedule under the programme which alleviates liquidity pressure during the first half of the sukuk tenure. 

The continued negative outlook reflects the rating agency’s increasing concerns on the impact of a further delay of five months in construction completion of the MEX Extension project. The project completion has now been revised to March 2020 from October 2019, with tolling operations to commence in April 2020. As at April 30, 2019, physical progress stood at 82.3% against the scheduled progress of 96.0%¹. The delay has been attributed to permit approvals and land acquisition issues. MEX II had earlier applied to Lembaga Lebuhraya Malaysia for an extension of time and is currently waiting for the latter’s approval².  

Despite the delay, the overall project cost of RM1.29 billion has remained intact; there has been no utilisation of the provisional sum and additional variation orders would require further financing from Maju Holdings Sdn Bhd, the project owner and engineering, procurement and construction contractor. To ensure that the profit payments are met throughout the remaining construction period, MEX II has transferred RM78.0 million from the revenue account into the finance service reserve account on May 30, 2019. This amount covers upcoming coupon payments in October 2019 and April 2020.  

Under the rating case scenario, the minimum and average finance service cover ratios (FSCR) are 2.09x and 2.64x. Under a stressed case incorporating a six-month delay from the revised tolling operations date in April 2020, the minimum and average FSCR would decline to 1.87x and 2.43x against the minimum covenanted FSCR of 1.75x. MARC views that a further delay in the commencement of tolling operations beyond October 2020 on the MEX Extension would likely lead to a breach of its FSCR covenant. The rating  

agency also notes that MEX II’s related concession company, Maju Expressway Sdn Bhd, the concessionaire for MEX, is currently in a tight liquidity position. MARC will closely monitor this situation and the construction progress of MEX Extension; any deviation from the current timeline or weakening liquidity position would trigger a downward rating action.

Major Rating Factors

Strengths 

• Direct connectivity from Kuala Lumpur city centre to KLIA; 
• Traffic volume visibility supported by existing traffic at Maju Expressway’s Putrajaya toll exit; and 
• Debt amortisation matches the anticipated ramp-up in project cash flows. 

Challenges/Risks 

• Construction cost overruns and completion delays; 
• Competition from alternative routes; and 
• Potential toll hike deferrals and delays in receipt of government compensation.