MARC has affirmed the rating of A+ID on toll road concessionaire, Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd's (Kesturi) RM780 million redeemable secured serial bonds under an Islamic Istisna Sukuk (Sukuk). The rating carries a stable outlook. The rating affirmation takes into consideration the strategic alignment of the 18 km Duta-Ulu Kelang Expressway (DUKE) that links to a network of major highways in the Klang Valley; and its near-completion status that considerably mitigates construction and completion risks. These strengths are offset by concerns over significantly lower than projected toll collections caused by deviation from traffic forecast, an anticipated delay in construction and commencement of tolling operation, competition from alternative toll-free routes, the sensitivity of toll road users to the proposed toll rates as well as increasing political pressure to adjust toll rates of highway concessions.

Established in 2000, Kesturi is the concessionaire for the design, construction, operation and maintenance of DUKE which connects the North Klang Valley Expressway on the western side of the capital to the Kuala Lumpur-Karak Highway on the eastern side and onwards to Middle Ring Road 2 (MRR2) at Jalan Ulu Kelang. Designed to alleviate congestion around the expressway’s surrounding routes, the expressway is predominantly dual three-lane carriageway with seven grade separated interchanges and six directional ramps.

Construction and completion risks have been largely eliminated with the near-completion status of the expressway. Construction progress was reported at 94.41% as at November 30, 2008, with Section 2 and 3 achieving practical completion as at November 30, 2008. However, due to the delay in getting government’s approval for tolling, which was originally scheduled on January 1, 2009, both sections are targeted to commence tolling on February 1, 2009, a month after completion. Completion of Section 1 of the DUKE (from Jalan Khalsa to Sentul ramp and Jalan Kuching U-turn ramp) will, however, be delayed to March 31, 2009 due to delays in land acquisition and in obtaining other relevant approval. Nonetheless, with the delay in the completion of Section 1, tolling is now expected to commence in May 2009. The delay in tolling is projected to have minimal impact on Kesturi’s cash flow in 2009.

The balance in Kesturi’s Financial Service Reserve Account of about RM33.0 million is sufficient to meet its next coupon payment in April 2009. In addition, Kesturi will be seeking compensation from the government for loss of revenue and interest due to the delay in the land acquisition. The first Sukuk redemption of RM50.0 million which is due in October 2010 will be supported by toll collection from the expressway’s second year of tolling operations.

Post-completion, market or traffic risk would replace completion risk as the major project risk. Sensitivity analysis on Kesturi’s base case cash flow projections indicate that the toll road concessionaire should remain in compliance with its minimum finance service cover ratio unless actual traffic volume falls below 70% of traffic consultant’s projections during the first year of the ramp-up period (2009), and 75%, 80% and 90% respectively in the subsequent three years. There is therefore little margin of error in estimations of traffic, and a more extended ramp-up period than expected would impact cash flow projection measures.

As with any toll road concession, Kesturi faces regulatory risk, in particular concession renegotiation, which may expose Kesturi to downward revision of toll rates without the benefit of cash compensation. MARC has performed an impact assessment of the toll rate reduction against the base case and notes that Kesturi’s future cash flows is able to withstand a maximum reduction of 6% from the agreed toll rate in the first tolling year holding projected traffic numbers constant, with the assumption that a minimum 10% hike in toll rates is allowed every five years.

The stability of this rating will depend on DUKE’s ability to achieve projected traffic numbers and toll rates post-completion, which represent primary drivers of its overall debt servicing capacity. Any upward ratings movement is unlikely until traffic demand along the highway is established and stable while significantly lower than forecast levels of traffic demand would exert downward pressure on the rating.

Contacts:
Rustam Apandi Jamaludin, 03-2090 2250/ rustam@marc.com.my;
Sharidan Salleh, 03-2090 2243/ sharidan@marc.com.my