CREDIT ANALYSIS REPORT

PROJEK LINTASAN SUNGAI BESI - ULU KLANG SDN BHD - 2019

Report ID 6059 Popularity 1020 views 69 downloads 
Report Date Dec 2019 Product  
Company / Issuer Projek Lintasan Sungai Besi-Ulu Klang Sdn Bhd Sector Infrastructure & Utilities - Toll Road
Price (RM)
Normal: RM500.00        
  Add to Cart
Rationale

MARC has affirmed its A+IS(s) rating on Projek Lintasan Sungai Besi-Ulu Klang Sdn Bhd’s (PLSUKE) Sukuk Wakalah Programme (Sukuk Wakalah) of up to RM2.0 billion. The rating outlook remains negative. Concurrently, the rating agency has affirmed its AAAIS(fg)/Stable rating on PLSUKE’s Danajamin-Guaranteed Facilities (Danajamin-Guaranteed Sukuk) of up to RM500.0 million. Danajamin Nasional Berhad (Danajamin) carries a long-term counterparty credit rating of AAA/Stable from MARC.

PLSUKE is wholly owned by Projek Lintasan Kota Holdings Sdn Bhd (PROLINTAS), an investment holding company with a portfolio of six toll road concessions, of which four are in operations while two are under construction. PLSUKE is undertaking the construction of the 24.4-km Sungai Besi-Ulu Kelang Elevated Expressway (SUKE) under a 55-year government concession effective December 25, 2014, with a conditional extension of another 10 years. The affirmed rating on the Sukuk Wakalah reflects the credit strength of PROLINTAS, which has extended an unconditional and irrevocable completion guarantee to cover potential cost overruns and shortfalls in the finance service reserve account (FSRA) and/or finance payment account (FPA) during the construction period, if any. PROLINTAS has also given its corporate guarantee on PLSUKE’s principal and profit payments on the Senior Facilities and the Government Support Financing (GSF).

The Sukuk Wakalah was placed on a negative outlook last year due to the uncertainty over the industry’s regulatory environment, which could impact PROLINTAS.  While the risk from any immediate resolution to the tolling issue has since substantially abated, the negative outlook is maintained as MARC views the project to be vulnerable to time overrun, which could potentially lead to a cost overrun.

Completion of the highway is still aimed for August 2020, although a key stretch of SUKE, namely work package CA3 which carries a weightage of about 20% of construction cost, has markedly fallen behind schedule. PLSUKE had set an internal target date of December 2019 for the completion of CA3. This date now appears highly unlikely to be met as limited skilled workers and construction complexity at the Alam Damai stretch have hindered construction progress. MARC understands that these issues are being addressed by dividing CA3 into three zones and appointing three additional sub-contractors. Notwithstanding these changes, the CA3 schedule adjustment (from December 2019 to August 2020) means there is now no time buffer to the completion date in August 2020. To recap, PLSUKE had previously set an internal target date of March 2020 to complete the project that would have given them a five-month buffer against the expected completion date. MARC has, however, factored a six-month delay into its sensitised cash flow projections. 

PROLINTAS is wholly owned by Permodalan Nasional Berhad (PNB), a government-owned investment fund. Its long-term rating of A+ benefits from a one-notch uplift on the high likelihood of parental support from PNB. The ultimate parent had injected some RM2.49 billion into PROLINTAS in the past four years through the issuance of ordinary shares and cumulative convertible redeemable preference shares. PROLINTAS’ standalone rating also considers its established track record as a highway developer, operator and concessionaire. The rating is, however, moderated by the company’s high gearing position and substantial finance cost that could exert pressure on its profitability and cash flow protection metrics.  

MARC notes that the Senior Facilities comprising the Sukuk Wakalah, Danajamin-Guaranteed Sukuk and the Syndicated Islamic Term Facilities (SITF) of up to RM4.7 billion in aggregate are non-amortising. All are due in 2027, just seven years after the expected completion of the expressway in August 2020. SUKE is very unlikely to generate enough cash flow in that seven years to meet the said bullet repayment in 2027. As such – in the absence of financial support from its shareholders – PLSUKE may need to refinance its financial obligations by 2027. There may be a refinancing risk, but the long remaining tenure of the concession (at least 42 years) could provide room for such refinancing exercise.

Previous performance issues related to work packages CA1 and CA2 had led to the appointment of two new main contractors to take over from the original contractors. This had necessitated a third construction work programme, which was approved by Lembaga Lebuhraya Malaysia (LLM) on August 19, 2019. 

Under the revised work plan, construction progress as at September 25, 2019 stood at 64.3%, slightly ahead of schedule. PLSUKE now has 100% possession of the project site compared to 98.4% in the previous review, reducing any risk of delay related to land acquisition. In respect of costs, RM3.76 billion had been spent as of end-September 2019 (i.e. 50.1% of the total project cost of RM7.55 billion). Of the total, construction cost makes up RM5.50 billion. As at end-September 2019, PLSUKE’s cash reserves stood at RM689.7 million. This, coupled with RM476 million and RM1.42 billion still available under the respective GSF and the SITF, should be sufficient to fund the remaining construction cost estimated at RM2.54 billion.

Major Rating Factors 

Strengths

  • Completion and corporate guarantees from project sponsor;
  • Support from ultimate parent for the project;
  • Direct connectivity to major highways in the Klang Valley; and 
  • Long-tenured concession.

Challenges/Risks

  • Significant refinancing risk due to balloon repayment in 2027;
  • Construction cost overruns and completion delay;
  • Impact on toll revenue if traffic spillover from existing toll-free roads is lower than expected; and
  • Potential toll hike deferrals and delays in receipt of government compensation.

Related