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 with regard to security ranking and payment priority. The outlook on the ratings has been revised to stable from negative. 

The ratings affirmation considers the improvement in traffic volume and the project’s manageable debt structure that aligns debt maturity to cash flow. The lower debt-service burden in the first few years provides some degree of flexibility to deal with traffic uncertainty in the initial years. Moderating the ratings, however, are the highly leveraged capital structure and the bottlenecks at Duta Ulu-Kelang Expressway (DUKE) Phase-1 – particularly during peak hours – which could restrict future traffic growth. 

The ratings outlook revision to stable from negative reflects our view that the risk on Kesturi from any immediate resolution to the tolling issue has abated. The government’s recent initiatives are related mainly to the planned acquisition of Shah Alam Expressway (KESAS), Damansara-Puchong Expressway (LDP), Sprint Expressway (SPRINT) and the SMART Tunnel, as well as the 18% toll discount involving Projek Lebuhraya Usahasama Berhad (PLUS). 

Kesturi’s overall average daily traffic (ADT) grew 8.2% y-o-y to 192,931 vehicles for financial year ended June 30, 2019 (FY2019). All toll plazas on DUKE Phase-1 - with the exception of Ayer Panas – posted a modest traffic growth. Traffic at the Ayer Panas toll plaza contracted 3.2% y-o-y largely due to heavy traffic congestion caused by construction works at DUKE Phase-3 near Setiawangsa. Notwithstanding the overall growth, Kesturi’s traffic performance is substantially lower than projections, with ADT at all toll plazas on DUKE-Phase 1 coming in at 8.8%-25.6% below forecasts. Apart from the congestion issues, delays in some of the developments that were considered in the traffic forecasts had also contributed to the lower-than-expected traffic performance.  

DUKE Phase-2 saw a ramp-up in traffic volume. Tun Razak Link, which opened on September 28, 2017, grew its ADT to 18,701 vehicles in FY2019 (FY2018: 12,798 vehicles). Sri Damansara Link, which commenced operations on October 23, 2017, also reported a jump in traffic volume to 41,876 vehicles (FY2018: 32,747 vehicles). Despite the progress, traffic on both links came below projections, with ADT on  Tun Razak Link falling nearly 52% off target while  Sri Damansara Link’s ADT fell short by 3.3%. The big gap at Tun Razak Link is mainly attributable to peak-hour congestion at the Sentul Pasar toll plaza, Bulatan Pahang and the Jalan Tun Razak exit, causing traffic backlogs that can stretch up to a few kilometres at times. 

For this current review, Kesturi has revised downwards its traffic growth forecast for 2020–2033 based on a new traffic study carried out by a traffic consultant in 2019. Its 2019 projections for DUKE Phase-1 and DUKE Phase-2 are generally 4% and 7% lower from the previous forecast, reflecting primarily Kesturi’s current performance and a more gradual pace of the developments along its alignments and surrounding areas. 

Under MARC’s sensitised case, ADT for DUKE Phase-1 has been assumed at 132,647 vehicles for 2020 (mirrors that of actual 2019) and no growth (in years with a toll rate hike) to 2% p.a. on average thereafter. For DUKE Phase-2, MARC has assumed a reasonable traffic ramp-up of 10% in 2020 (from 2019’s ADT of 60,577 vehicles) and a gradual growth in future years, with no growth in ADT (in years with a toll rate hike) to 3% p.a. on average. 

Based on these sensitivities, minimum Senior finance service cover ratio (FSCR) is estimated at 2.1x, still comfortably above the covenanted 1.75x. This indicates KESTURI’s adequate debt-servicing ability under the traffic downside scenario. By further sensitising the cash flow to incorporate a one-year postponement in the scheduled toll hikes and a one-year delay in the payment of toll compensation, minimum FSCR could ease to about 1.7x by FY2025.  

In FY2019, Kesturi’s tolling revenue rose 19.5% to RM176.1 million, primarily driven by full-year revenue contributions from Tun Razak Link and Sri Damansara Link. In comparison, results for FY2018 reflected the toll performance of the two links over a nine-month and 10-month period. Cash flow from operations (CFO) in FY2019 rose in tandem to RM153.7 million, up by 22%. However, typical of toll road concessionaires, Kesturi’s high financing cost significantly impacts its bottom line. For FY2019, it reported pre-tax losses of RM10.2 million.