MARC has placed its rating of AAIS on Alloy Properties Sdn Bhd’s (formerly known as Haluan Gigih Sdn Bhd) (APSB) Sukuk Musyarakah Medium Term Note (IMTN) Programme of up to RM240.0 million on MARCWatch Negative. The rating action reflects MARC’s concerns over the announced freeze on toll rate increases for toll road concessions of related entities and the early termination of the East West Link Expressway (EWL) on the issuer. The government had on January 28, 2011 announced a five-year freeze on toll rate hikes for the Kuala Lumpur-Karak Expressway (KL-Karak), the East Coast Expressway Phase 1 (ECE1) and the early termination of the EWL. The aforementioned developments will inevitably result in weaker operating cash flow generation at Alloy Toll Management Sdn Bhd (ATM) whose net cash flows are assigned for the repayment of the notes.

APSB was originally incorporated to purchase two office buildings from the MTD group of companies. The sources of repayment for its IMTN Programme are the rental proceeds from the two buildings as well as assigned net cash flows from ATM and Alloy Maintenance and Engineering Sdn Bhd (AME). ATM’s principal activity is toll collection operations for the KL-Karak, ECE1 and EWL on behalf of MTD Prime Sdn Bhd (MTD Prime) and Metramac Sdn Bhd while AME’s principal activity is the operation and maintenance of the KL-Karak and ECE1.

ATM is paid a fixed percentage of all toll revenues collected from the KL-Karak and ECE1 and previously received a fixed monthly sum for toll collection services on the EWL. While MARC is aware that related entity and concession holder of the KL-Karak, MTD Prime, is considering a compensation scheme to offset the impact of the reduced future revenues, the rating agency’s preliminary view is that the reliability of cash flows derived from such ‘support’ may be lower than that of current contractually determined revenues that are essentially supported by predictable toll revenue streams. MARC will be giving due regard to the potential increase in ATM’s financial dependency on MTD Prime with the implementation of the compensation scheme.

Of longer-term credit implications is the proposed acquisition of all of MTD group’s Malaysian toll road business, including the KL-Karak and ECE1 by a special purpose vehicle (SPV) owned by MTD Capital Bhd’s group executive chairman and its president/CEO. MARC understands that the toll road concessionaires’ existing operating agreements with ATM and AME would be novated to the new SPV. Uncertainties with regard to the time frame for the proposed transaction and the outcome in terms of the credit profile of the new SPV prevent a meaningful assessment of the longer-term implications of the corporate exercise at this juncture.

APSB’s projected cash flow debt service metrics post-termination of the EWL and incorporating the freeze on toll rate hikes will be addressed in MARC’s ongoing review. MARC expects to resolve the MARCWatch Negative after reviewing traffic forecasts for KL-Karak and ECE1, as well as the performance of other identified assigned revenue streams for the transaction.

Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
Jason Kok, +603-2082 2258 / jason@marc.com.my.