LEBUHRAYA DUKE FASA 3 SDN BHD - 2019

MARC has affirmed its rating of AA_-IS on toll concessionaire Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah. The rating outlook remains negative.

DUKE 3, a wholly-owned subsidiary of Ekovest Berhad (Ekovest), is undertaking the design, construction, financing, operations and maintenance of the 32.1-km Setiawangsa-Pantai Expressway (SPE) in Kuala Lumpur. SPE will connect Middle Ring Road 2 at Wangsa Maju to Kerinchi Link adjoining Federal Highway and is being built under a concession agreement (CA) with the Malaysian government ending August 5, 2069.

The Sukuk Wakalah was put on a negative outlook last year over the uncertainty on the direction of the toll road sector following the government’s decision to review toll road concessions and their tariff framework. The negative outlook also incorporated a delay in receipt of the reimbursable interest assistance (RIA) from the government amounting to RM460.0 million that could potentially affect DUKE 3’s debt-servicing ability.

While the sector’s regulatory environment appears more settled and the RIA has been fully received in April 2019, the rating outlook remains negative as there is now a risk of time overrun. This is arising from the change in alignment at the Bandar Malaysia stretch, a circumstance that is beyond the scope of DUKE 3’s control. While the issue is now resolved, that change in decision over the road alignment at Bandar Malaysia, and the consequent need to restart the land acquisition process have set the construction back by 14 months. As a result, project completion is now projected to be in November 2020 instead of February 2020 as initially planned. Under the latest work plan, progress of construction as at end-September 2019 stood at 62.8% against the scheduled 64.7%, slightly behind schedule but deemed manageable. 

Commencement of tolling operations is accordingly expected to be deferred to January 2021, nine months later than the initially scheduled April 2020. This could compromise DUKE 3’s debt protection metrics. However, a Construction Reserve Account (CRA) is in place to mitigate potential cash flow issues arising from tolling delays and cost overruns. In this regard, Ekovest had procured a Bank Guarantee (BG) from AmBank Islamic amounting to RM184.5 million to meet the requirement under the Minimum CRA Balance (i.e. 5% of the construction cost). The sum under the BG can be drawn down partly and when required to maintain the cash buffer at a level that meets the covenanted finance service cover ratio (FSCR) of 1.50

SPE is expected to be completed within the RM3.86 billion budgeted cost. In the event of any cost overruns, this is expected to be absorbed by Ekovest given the fixed-price contract entered into with the engineering, procurement and construction (EPC) contractor. Meanwhile, project funding is sufficient to finance completion; as at end-September 2019, DUKE 3 had close to RM2 billion in the Investment Funds (i.e. unutilised funds drawn down from the facility which were invested in money market instruments) to fund the remaining 37% of works. In addition, there is approximately RM238 million in the Designated Accounts to help meet the next semi-annual profit payment of RM109.3 million due in February 2020.

Under the latest cash flow projections that take into consideration the CRA, DUKE 3’s minimum and average pre-distribution FSCR with cash balance are projected at 2.36x and 2.68x. With MARC’s sensitivity of a six-month tolling delay (i.e. start of tolling in July 2021 versus base case’s January 2021), our projections indicate that DUKE 3 can still maintain its minimum FSCR around 2.1x. Our sensitivities indicate that DUKE 3’s cash flow can tolerate up to approximately 10% reduction in traffic volume coupled with the six-month tolling delay before it breaches the 1.50x covenanted FSCR in 2035.

MARC will continue to monitor the project progress closely. The rating could be downgraded if the project is unlikely to be completed within the current timeline (i.e. November 2020) and cost parameters. Conversely, evidence that the project is likely to be completed on time and within cost could stabilise the rating outlook.

Major Rating Factors

Strengths

• Well-positioned alignment within mature catchment areas;
• Accessibility via a network of major roadways;
• Debt amortisation matches project cash flows; and
• Long-dated concession tenure.

Challenges/Risks

• Moderate debt protection measures for the sukuk;
• Construction cost overruns and completion delay; and
• Risk of toll hike deferrals and delays in receipt of government compensation.