Malaysian Rating Corporation Berhad (MARC) has assigned a long-term Islamic debt rating of AID (A, Islamic Debt Security) to Sistem-Lingkaran Lebuhraya Kajang Sdn Bhd’s (SILK) Notional Amount of RM2.01billion Al-Bai’ Bithaman Ajil Islamic Debt Securities Issuance Facility.

The rating reflects the perceived strong demand for the Kajang Traffic Dispersal Ring Road to relieve severe traffic congestion in the Kajang District. Project demand is further underpinned by the Ring Road’s function as a primary urban road linking the populous districts of Balakong, Sungei Long, Semenyih, Bangi, Kajang and Serdang in the south-eastern corridor of the Klang Valley. The Ring Road, whose main function is for commuter use, will form an integral component of the overall strategic road network of the Klang Valley. Existing traffic levels in the Ring Road corridor lend support to opening year forecast traffic levels while moderate traffic growth potential is afforded by the service area’s economy and growth prospects. Additional credit strengths include the allocation of construction risk to a capable contractor through a fixed-price, date-certain contract, and a financing structure that ensures that noteholders receive adequate protection. The project has received strong support from the federal government, being perhaps the first toll facility to receive federal funding in the form of a grant. Tangible support for the project is also provided by project sponsors by way of an undertaking to contribute equity and/or quasi-equity funding of up to RM220 million and more importantly, to provide liquidity support post completion of the project on a joint and several basis.

Moderating the above strengths are potential delays in land acquisition, which could hinder adherence to the project’s tight construction schedule, and uncertainties surrounding long-term traffic growth, the toll sensitivity of road users to economic cycles, and to a lesser extent, toll acceptance.

The Kajang Traffic Dispersal Ring Road has been privatized as a 36-year concession. SILK, a special purpose company, holds the concession for the highway, The owners of SILK are Sunway Holdings Incorporated Bhd (SunInc) (50%) and Barisan Minda Sdn Bhd (50%). SunInc is the holding company of a major property development and construction group in Malaysia to which the project’s turnkey contractor, Sunway Construction Berhad (Suncon), also belongs. Barisan Minda’s business is presently confined to owning 50% of SILK. MARC believes that SILK’s shareholders individually and collectively possess a substantial financial and strategic interest to see the project successfully through the construction and operation phases.

Proceeds from the ABBA notes, together with the RM220 million committed by SILK’s shareholders, will be used to finance land costs and the construction of the 37-km long Ring Road. In place of a RM300 million Government Support Loan for the financing of land costs, a Supplementary Agreement to the Concession Agreement signed on August 1, 2001 sees the federal government providing a grant of up to RM450 million. The latter will be used to part finance the project’s land cost and construction costs. Cash debt service for the notes commences in year 2006, an estimated three years after the scheduled opening of the Ring Road. MARC views this accretion feature of the securities positively in that it accommodates a less onerous cash debt service burden in the early years of tolling, usually a period in respect of which traffic flows have not stabilized. The 20-year tenure of the facility and its amortizing structure alleviates refinancing concerns typical of shorter debt maturities and bullet structures. Upon completion of construction, SILK will be required to fund a debt service reserve account (DSRA) until it reaches its required level, which equals to 50% of the first projected debt service payment. Thereafter, SILK is required to maintain a debt service balance equal to 50% of the next scheduled payment on the notes.

The traffic consultant’s base case scenario projects a compounded annual growth in traffic of 8% through 2020. In addition to the growth in traffic, revenue growth assumes increments every five years in the scheduled annual toll rate until 2019.   Thereafter, toll rates remains fixed for remaining life of the concession. If these traffic and toll increases occur as projected, debt service coverage is expected to average 8.34x with the lowest coverage of 2.48x in 2008. Projected net toll revenues demonstrate an ability to withstand most stress scenarios and still adequately cover debt service when due. Furthermore, the shareholders of SILK are obligated to support SILK’s cash flow to maintain a 1.25x DSCR in the post completion phase during the tenure of the facility.