MARC Ratings has affirmed its rating of AA-_IS with a stable outlook on toll concessionaire Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah. 

DUKE 3 is involved in the construction of the 32-km Setiawangsa-Pantai Expressway (SPE) that connects Middle Ring Road 2 (MRR2) at Wangsa Maju to Kerinchi Link adjoining Federal Highway. It is being built under a concession agreement (CA) with the Malaysian government ending August 5, 2069.

The rating incorporates the adequately structured sukuk repayment profile that accommodates the traffic ramp-up on 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, generate cash and meet its financial obligations. The rating also considers SPE’s well-positioned alignment within mature catchment areas. 

As of March 25, 2022, the project achieved 92.47% completion rate. Due to the extended impact of the pandemic, Lembaga Lebuhraya Malaysia (LLM) had approved DUKE 3’s request for a second Extension of Time (EOT No. 2) to June 3, 2022, from October 31, 2021 under EOT No. 1. However, given the delays in utilities relocation and interface issues, the toll concessionaire has applied for another extension to December 23, 2022, which is pending approval from LLM.

We note that of the four sections of SPE, Section 4 (Wangsa Maju toll plaza) has commenced tolling since March 1, 2022. Given the completion delays on the other sections, we have revised our sensitivity analysis by incorporating a later tolling start date on the rest of the toll plazas to March 2023 (3-month delay) and June 2023 (6-month delay). 

Under MARC Ratings’ rating case, average finance service coverage ratio (FSCR) with cash throughout the sukuk tenure is projected at 3.3x. The FSCR is projected to still meet the covenanted 1.5x up until FY2036. The rating case has, nevertheless, assumed interest and principal repayments on the Reimbursable Interest Assistance (RIA) totalling RM560.1 million over FY2024–FY2039. The RIA is technically subordinated to the sukuk in terms of cash flow or payment priority. On the assumption that all payments relating to the RIA are deferred to after FY2039 (i.e. after the full repayment of the sukuk), DUKE 3’s debt servicing ability is expected to be stronger, with the FSCR projected to meet the covenant throughout the sukuk tenure. Further assuming a tolling delay of 3 months and 6 months, the FSCR would still meet the covenant up to FY2038. All estimates are based on conservative assumptions of no toll hikes and no toll compensations.

DUKE 3’s cash position is supported by the RM90 million that project sponsor Ekovest Berhad will place into the Operating Revenue Account (ORA) upon completion of the project. At the same time, the RM184.5 million currently in the Construction Reserve Account will also be transferred into the ORA. The total RM274.5 million in the ORA — in the form of an irrevocable and unconditional bank guarantee — can be partly or fully drawn down when required to ensure the covenanted FSCR is maintained.

Meanwhile, construction cost–related risk is largely addressed by a fixed-priced, lump-sum turnkey engineering, procurement and construction contract with Ekovest Construction Sdn Bhd. We note that there are design enhancements to be carried out outside the original scope of the project worth RM417.2 million that will be covered by ultimate shareholder Ekovest via equity injection of an equivalent amount. The total amount claimed under the variation order as at end-April 2022 is RM405.97 million. As of January 5, 2022, Ekovest had injected a total of RM243 million, with the balance expected to be injected prior to the project completion.

Our assessment indicates no pressure on the company’s debt-servicing ability in the short to medium term given that it has RM712.6 million in cash and cash equivalents as at end-January 2022 to address liquidity risk. The current financing structure also provides DUKE 3 with a 31.5-year tail period, providing room for a refinancing exercise, if required. 

Upside is unlikely in the current economic environment given the completion risk and absence of a track record. 

Major execution failures, including a severe delay in project completion and large cost overruns weighing on cash flow generation and financial metrics.