MARC Ratings 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 importance of KL-Karak and ECE1 as essential transportation links to the east coast of Malaysia. These supports a stable traffic and revenue base for ANIH, enabling 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, giving some headroom against operational underperformance. Moderating the rating, however, is ANIH’s highly leveraged capital structure.

Traffic on the two roads fell through the unprecedented pandemic (-38.4% for KL-Karak and -24.8% for ECE1) in FYE March 2021 (FY2021). However, traffic in 1QFY2023 (April-June 2022) has shown a sharp rebound from the pandemic lows with volumes at 108% (KL-Karak) and 127.5% (ECE1) of the levels observed in the same period of FY2020 (pre-pandemic). Figures reported show stronger-than-expected recoveries in traffic. We now anticipate normalised traffic volumes in FY2023, earlier from FY2024 as previously expected. Prior to the pandemic, aggregate traffic on the two highways grew at a moderate compound annual growth rate (CAGR) of 1%-2% over FY2015-FY2019, reflecting a mature system.

Base case projections envisage a minimum finance service coverage ratio (FSCR) of 1.9x and an average of 2.0x through FY2030. Our rating case assumptions largely reflect ANIH’s financial forecasts, which we consider reasonable, with a moderate stress that applies a slower traffic growth of 1% p.a. Under these assumptions that reflect our view of long-term sustainable performance, the minimum and average FSCRs are 1.8x and 1.9x through FY2030. 

The base case considers receipt of toll compensation of around RM40 million to RM50 million a year, a range fairly consistent with past years. We expect ANIH to be entitled to claim and receive compensation from the government, as has been demonstrated in the past. While we believe this to be remote, a nil compensation could result in the FSCR falling below the covenanted 1.75x by FY2024. On the whole, we note a thinner, albeit sufficient, financial buffer on debt service (as measured by the FSCR) than our previous forecasts. This stems from a certain investment made in a subsidiary. We will continue to monitor the situation and incorporate future material credit events, if any.

In terms of liquidity, ANIH had RM243.2 million in cash as of end-June 2022. This, together with our expectation of broadly normal operating cash flow (CFO) exceeding RM250 million in 2022-2023 — supported by traffic volume improvements, and a significantly better operating environment than in 2020-2021 — is sufficient to cover its RM160.0 million of sukuk principal due on November 29, 2022.  

The stable outlook reflects ANIH’s stable and mature road network, and our expectation that the roads’ strong operating track record — with a long, demonstrated record of traffic and revenue growth with moderate volatility — will underpin cash flow predictability. 

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.