MARC has reaffirmed the rating of A+ID on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (“Kesturi”) issuance of up to RM780 million redeemable secured serial bonds under an Islamic Istisna Sukuk (“Sukuk”). Kesturi is Duta-Ulu Kelang Expressway’s (“DUKE”) concessionaire. The rating carries a Stable Outlook.

DUKE is a strategic alignment connecting the North Klang Valley Expressway on the western part of Kuala Lumpur to the Kuala Lumpur-Karak Highway on the eastern side of the city and onwards to Middle Ring Road 2 (“MRR2”) at Jalan Ulu Kelang. The rating is underpinned by the highway’s expected demand profile, moderate construction completion risk, and structural protections afforded by the terms of the issuance.

However, moderating the above positive factors are traffic forecast inaccuracy which is always a key rating factor for start-up toll roads, the presence of competition for traffic in the form of alternative routes, as well as the sensitivity of toll users to the proposed toll rates.

On 12th August 2004, Kesturi was appointed by the Government of Malaysia (“GOM”) as the concession company to design, construct, operate, manage and maintain the DUKE. In return, Kesturi would be given the right to manage the toll operations and collect toll receipts under a concession agreement with the GOM for a period of 34 years (three-year construction period and operating period of 31 years). Kesturi is wholly-owned by Nuzen Corporation Sdn Bhd which is a 70:30 joint-venture company between Wira Kristal Sdn Bhd (“WKSB”) and Malaysian Resources Corporation Bhd (“MRCB”). The Sukuk comprise the largest portion of the total financing of the project, at 76.1%. The balance 23.9% is provided by RM195 million of redeemable preference shares and RM50 million of ordinary shares.

Project construction and completion risk is largely mitigated by the technically straightforward nature of the project, the reasonable construction schedule, and the competence and experience of Ekovest Construction Sdn Bhd (“Ekovest”), the turnkey contractor for the highway. Ekovest bears the risk of construction cost overruns under the lump sum fixed price, date certain, turnkey contract. As at end-December 2006, overall construction progress on the highway supports the targeted completion date in October 2008, although construction was slightly behind schedule by 1.6%.

Tolling on the highway is on an ‘open basis’ concept and the three toll plazas are located along DUKE’s alignment. The Highway is designed with unidirectional toll plazas where motorists plying the Highway will only be paying once whichever direction they take. Perunding Trafik Klasik Sdn Bhd, the traffic study consultant, estimated that 163,024 vehicles will pass through the three toll plazas in the first full year of operation. The amortization of the Sukuk is spread over nine years, commencing in year 2010, two years after the completion of the highway, by which time MARC expects improved visibility of DUKE’s cash flow generation potential through 2018.

Based on MARC’s sensitivity analysis on the traffic forecast which incorporates revenue reduction between 17%-22% per annum during the tenure of the Sukuk, a 2-month delay in the commencement of tolling, increase in operating expenditure above base case projections as well as lower toll rates in the second operating period (2013-2017) and a delay in receipt of compensation from the government, the projected Finance Service Coverage Ratio is expected to average around 1.9x throughout the tenure of the facility. The FSCR did not fall below 1.5 times in the stress case.

The stable outlook reflects the view that downward rating movement due to potential construction-related problems is unlikely to occur in the pre-completion phase. Upward movement of the rating will be limited until the highway is successfully completed and traffic growth levels and tolls do not deviate materially from projections.