MARC has affirmed its AA_IS rating on ANIH Berhad's RM2.5 billion Senior Sukuk Musharakah Programme with a stable outlook. ANIH is the concessionaire of Kuala Lumpur-Karak Highway (KL-Karak) and Phase 1 of East Coast Expressway (ECE1) until 2032. 

The rating reflects the highways’ historically stable traffic and revenue profile that support sufficient cash flow generation to meet the concessionaire’s finance service obligations. The rating also benefits from the subordinated and equity-like features of ANIH’s RM620 million Junior Bonds that, to some degree, allow the concessionaire to withstand operational underperformance. Moderating the rating, however, is ANIH’s highly leveraged capital structure.

The outbreak of COVID-19 and its related containment measures have created a challenging environment for the road sector. ANIH’s traffic data have indicated some impairment. Traffic on KL-Karak and ECE1 fell 38.4% and 24.8% in FYE March 2021 (FY2021). Traffic volumes were largely influenced by responses to the COVID-19 pandemic and the level of travel restrictions imposed to contain the virus. However, traffic on both highways seems to have bottomed out in April 2020 after the first Movement Control Order (MCO) came into force from March 18 to May 3, 2020, where the maximum monthly traffic declines were about 90% (KL-Karak) and 87% (ECE1). Traffic remained subdued in the first five months of FY2022 (April 2021-August 2021) with traffic remaining roughly half that of 5MFY2021 levels. However, we see the recent lifting of the interstate travel ban as positive. We note that in the periods during the pandemic when restrictions have been lifted or eased (notably June-August 2020), traffic quickly rebounded to levels at or above pre-COVID. Although the timing and shape of recovery are still uncertain, and risks remain, we believe traffic should recover from peak contractions. Accordingly, we expect traffic declines to ease to around 30%-35% y-o-y for the full FY2022 and to gradually return to pre-pandemic levels by FY2024.  

Overall, notwithstanding some weaknesses in the last 12-18 months following the coronavirus crisis, traffic on the mature KL-Karak and ECE1 have been on a path of steady, albeit moderate, growth. Road traffic for the two highways has grown at a compound annual growth rate (CAGR) of 1%-2% over FY2015-FY2019 and we expect this to continue once the COVID-19 pandemic subsides.

In the current coronavirus context, and considering actual traffic performance to August 2021, we have revised our rating case to reflect a scenario that includes a 30% traffic decline for both KL-Karak and ECE1 in FY2022, a recovery to 90% of FY2020’s traffic levels in FY2023, a full traffic recovery by FY2024 and a traffic growth of 1%-2% thereafter (tracking the five-year CAGR prior to the pandemic). Under this scenario, average and minimum financial service cover ratios (FSCR) are projected at 1.9x and 1.8x (FY2026) against the covenanted 1.75x. We highlight, however, that these are under our more conservative assumptions of no toll hikes and no toll compensations except for the amount already received in FY2022. For FY2022, we project an FSCR of around 2.1x, and that ANIH could withstand an estimated 44% y-o-y decline in revenue and still maintain its FSCR at 1.75x. As at December 13, 2021, the outstanding sukuk stood at RM1.64 billion and its next principal repayment of RM160.0 million is due on November 29, 2022 for which the company has sufficient liquidity as at date.

The stable outlook reflects our expectation of a more stable economic backdrop with the opening of the economy and relaxation of travel restrictions, which will support road travel demand. We expect traffic levels at KL-Karak and ECE1 to improve accordingly from their trough in early 2020. 

No upgrade is envisaged over the near term. On a longer term, any upgrade will take into consideration a sustained improvement in profitability, cash flow generation and overall financial profile. 

The rating may be pressured if there is a sustained deterioration in the company’s financial metrics, which could arise, inter alia, from a material degradation of traffic and revenue expectations.