MARC Ratings has affirmed its AAA_IS rating on Amanat Lebuhraya Rakyat Berhad’s (ALR) RM5.5 billion sukuk programme, with a stable outlook. The outstanding under the programme stood at RM5.5 billion as at September 29, 2023.

The rating reflects the strong cash flow generation capacity of ALR’s portfolio of matured highways in the Klang Valley, its strong debt service ability, and the low capital requirement for operations and maintenance (O&M) of the highways. A no-dividend policy as per the terms of the transaction reinforces ALR’s liquidity position that would afford ALR the ability to early redeem the sukuk by exercising of the call option on the first call date in FY2034. The rating is mainly moderated by the risk associated with traffic performance, although the rating agency draws comfort from the historically stable and mature traffic profile of key highways in the portfolio.

ALR’s road network comprises Shah Alam Expressway (KESAS), Lebuhraya Damansara-Puchong (LDP), The Western Kuala Lumpur Traffic Dispersal Scheme (SPRINT) and the Stormwater Management and Road Tunnel (SMART). KESAS, LDP and SPRINT collectively account for about 97% of ALR’s consolidated revenue for financial year ended March 31, 2023 (FY2023). Traffic levels on the three roads have proven to be relatively stable, with a moderate peak-to-trough of about 11% during 2015-2023 (excluding periods impacted by the pandemic). SMART’s peak-to-trough over the same period is greater at around 34%. However, SMART remains a small contributor to ALR’s overall earnings, accounting for only about 3% of its revenue in FY2023. Its impact on ALR’s financial metrics, therefore, is not expected to be significant.

The toll roads are strategically located in densely populated urban areas, with traffic predominantly made up of the more stable commuter base, i.e. light vehicles (more than 90%). The four highways combined have recorded a 20-year traffic compound annual growth rate (CAGR) of 5.7%, reflecting their steady underlying traffic base. Overall, post-pandemic traffic recovery has been swift. Collectively, the annual average daily traffic (AADT) had recovered in FY2023 (April 2022 – March 2023) and 1QFY2024 (April 2023 – June 2023) to 97% (933,300 vehicles) and 100% (967,500 vehicles) relative to 2019 levels. 

The rating agency views operational risk to be low considering the relatively straightforward nature of the highways’ O&M and draws comfort that the O&M continues to be performed by the concession companies, supported by the experienced senior management team from Gamuda Berhad via the Oversight Management Services Company (OMSC).

Total borrowings of RM5.5 billion as at end-June 2023 comprised entirely of the sukuk which was raised to acquire the concessionaires. Cash flow leverage (measured by debt-to-earnings before interest, tax and depreciation or EBITDA) based on annualised 1QFY2024 is estimated to be 8.6x. ALR’s cash generation ability is strong, which would support organic deleveraging. This counterbalances its current leveraged balance sheet. ALR’s liquidity position also benefits from the sukuk’s protective structural features, including a complete lock-up of operating cash and restrictions on dividends. While the build-up of cash would allow for early redemption of the sukuk, the excess cash provides a strong buffer to meet exigencies in scenarios of traffic underperformance. Moreover, if ALR is unable to early redeem the sukuk in FY2034, there is still up to four years of cash generation from LDP, SPRINT and SMART (KESAS’ concession agreement expires in 2034) before the legal maturity of the sukuk.

Under the base case cash flow projections, assuming a 15-year CAGR traffic growth of 1.9% over the sukuk tenure, average and minimum finance service cover ratios (FSCR) (with cash) are projected at 4.98x (excluding outlier FY2037) and 2.95x in FY2025. Under MARC Ratings’ sensitised downside scenario that assumed no traffic growth and a 5% additional y-o-y increase in opex from the base case, average FSCR is projected at 3.40x, with a minimum of 2.66x in FY2028. We have also considered an additional sensitised downside scenario that utilised the same no traffic growth and cost inflation assumptions but further assumed a decline in traffic volume of 30% for LDP in FY2028. This is considering a likely competition from the proposed Petaling Jaya Dispersal Link Expressway (PJD Expressway), which, if materialised, would run parallel to LDP. Under this scenario, the projected average FSCR stands at 2.61x, and the minimum is 1.78x in FY2033. Overall, the FSCR profile is strong and would comfortably meet the FSCR covenant of 1.5x throughout the sukuk tenure.

The stable outlook incorporates the expectation of a largely stable operating performance from the mature highway assets that have been operational for over two decades.