CREDIT ANALYSIS REPORT

LEBUHRAYA DUKE FASA 3 SDN BHD - 2020

Report ID 605318 Popularity 66 views 15 downloads 
Report Date Nov 2020 Product  
Company / Issuer Lebuhraya Duke Fasa 3 Sdn Bhd Sector Infrastructure & Utilities - Toll Road
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Rationale
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 is revised to stable from negative. 

The outlook revision is premised on MARC’s assessment regarding its earlier concern that construction delay on Setiawangsa-Pantai Expressway (SPE) would negatively impact DUKE 3’s financial metrics has now been sufficiently addressed by a liquidity support undertaking of up to RM274.5 million from the project sponsor, Ekovest Berhad, to ensure the transaction finance service coverage ratio (FSCR) with cash balance is maintained above the covenanted 1.5x. The sum of RM274.5 million is a combination of RM184.5 million from the existing construction reserve account (CRA) and an additional RM90 million which will be deposited into the operations reserve account (ORA) upon completion of the project. This will be in the form of cash or an irrevocable and unconditional bank guarantee. 

The rating agency views that construction cost-related risk has also been largely alleviated by a fixed-priced, lump-sum turnkey engineering, procurement and construction (EPC) contract with Ekovest Berhad. The 32-km SPE, which connects Middle Ring Road 2 (MRR2) at Wangsa Maju to Kerinchi Link adjoining Federal Highway, is being built under a concession agreement (CA) with the Malaysian government ending August 5, 2069. The rating affirmation incorporates the adequately structured sukuk repayment profile that accommodates the traffic ramp-up of SPE. The back-ended financing structure – with the first principal repayment of RM5.0 million due in 2023 and its gradual step-up feature – would provide some headroom for DUKE 3 to build up traffic volume and generate cash to meet its financial obligations. The rating also considers SPE’s well-positioned alignment within mature catchment areas that offers competitive benefits to traffic between the northeast and southeast of Kuala Lumpur given its cost advantages and shorter travelling time, particularly during peak hours. Moderating the rating are the slower-than-expected progress of the construction as well as traffic demand risk.

As at August 25, 2020, the overall progress of 70.8% was behind schedule by some 19%. Progress was largely hampered by the Movement Control Order (MCO) to contain the spread of COVID-19 that had essentially brought construction works to a near standstill for over three months from its implementation on March 18, 2020. Following this, an application was submitted to Lembaga Lebuhraya Malaysia (LLM) for an extension of time (EOT) to March 2022 to complete the project. DUKE 3 expects to receive approval by November 2020 on the extension request. While the extension sought is to March 2022 (full extent allowable under the CA as estimated by DUKE 3), the company has an internal target to complete SPE and commence tolling by July 2021. In terms of liquidity risk, the company has over RM1.5 billion in cash and cash equivalents as at end-July 2020 to address its near to medium term financial obligations.

Under DUKE 3’s latest cash flow projections, minimum and average FSCR are expected at 2.4x and 3.0x throughout the sukuk’s tenure. Based on MARC’s sensitised cash flow analysis, deferring commencement of tolling by another six months and taking a 10% cut to projected traffic volume, DUKE 3 is expected to be able to meet the minimum covenanted FSCR of 1.5x throughout the tenure of the sukuk. Incorporating a one-year deferment in the projected toll hikes, however, would result in it breaching the covenant in FYJune 2035 (1.4x) and FY2036 (1.3x). MARC, nevertheless, notes that DUKE 3’s base case has assumed principal repayments and interest payments vis-à-vis the Reimbursable Interest Assistance (RIA) totalling RM560.1 million over FY2024-FY2039. The RIA is subordinated to the sukuk in terms of cash flow or payment priority. Under the agreement with the government of Malaysia and the terms of the sukuk, the repayment of the RIA is subject to DUKE 3 meeting a minimum post-distribution FSCR of 2.0x. Assuming all payments relating to the RIA are deferred to after FY2039 (i.e. after the full redemption of the sukuk), the company’s debt-servicing ability would be stronger, with respective minimum and average FSCR of 1.9x and 2.5x. 

MARC’s breakeven analysis further indicates that DUKE 3 could tolerate up to a 13% decline in the projected traffic volume and still meet the covenanted FSCR of 1.5x throughout the transaction tenure. Traffic volume would need to reduce by around 17% when the minimum 1.0x cover of DUKE 3’s financial obligations is reached in FY2036. 

The stable outlook reflects MARC’s expectation that DUKE 3 will remain in compliance with its financial covenants. However, factors such as a weakening in the company’s financial or liquidity profile, or if there is a material change in the terms and conditions of the concession that negatively affects DUKE 3’s business or financial risk profile, could lead to downward rating pressure. The company is also exposed to the government’s transport policies. The rating/outlook could also be revised if there are adverse changes in the regulatory environment. 

Major Rating Factors

Strengths
Well-positioned alignment within mature catchment areas;
Accessibility via a network of major roads;
Accommodative debt amortisation schedule vis-à-vis project cash flows; and
Long-dated concession tenure.

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



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