MARC has assigned a preliminary rating of AAAIS to Projek Lebuhraya Usahasama Berhad's (PLUS Berhad) proposed RM23.35 billion Sukuk Musharakah Programme under which the company is to issue senior secured sukuk pending final documentation review. The rating outlook is stable.

PLUS Berhad is a wholly owned subsidiary of PLUS Malaysia Sdn Bhd (PLUS Malaysia), a 51:49 joint-venture company incorporated by UEM Group Berhad and Employees Provident Fund Board for the purpose of acquiring all assets and liabilities of PLUS Expressways Berhad (PEB) including PEB’s Malaysian highway concession assets. Under the supplemental concession agreements with the government, all concessions are set to expire on December 31, 2038, following which all highways will be transferred to the government at no cost. The next toll hike for all tolled expressways with the exception of Penang Bridge is scheduled to take place only on January 1, 2016 and future toll increases will be limited to a 5% increase every three years.

PLUS Berhad will acquire the assets of four entities which collectively hold all of PEB’s Malaysian tolled expressways concessions and the Penang Bridge concession for a total consideration of RM34 billion, of which RM19.6 billion will be funded by the senior secured sukuk. The sukuk issued by PLUS Berhad is to be repaid with future operating cash flows from the acquired portfolio of tolled expressways, the concessions of which will be novated to the issuer. The North South Expressway (NSE) in particular is expected to provide most of the cash flow to amortise PLUS Berhad's sukuk obligations.

The proposed senior secured sukuk will be issued in two series; proceeds from Series 1 will be used to part-finance the aforementioned acquisition. Meanwhile, drawdowns of proceeds from sukuk Series 2 will fund RM2.35 billion of planned capital spending for the highways over the next five years.

The senior secured sukuk ranks equal to other senior unsecured sukuk in PLUS Berhad's capital structure; however, the senior unsecured sukuk to be issued by the company of up to RM11.0 billion will benefit from an unconditional and irrevocable guarantee from the Government of Malaysia. Repayment of the government-guaranteed sukuk (GG Sukuk) is scheduled after the expiry of the Sukuk Musharakah Programme.

MARC views the issuer default risk as identical for the secured sukuk and GG sukuk during the tenure of the secured sukuk. Therefore, the analytical approach taken by MARC to rate the RM23.35 billion non-guaranteed sukuk is to assess PLUS Berhad's ability to meet its obligations on a single class of senior debt comprising both the secured sukuk and GG Sukuk. The final rating assigned to the senior secured sukuk includes a two-notch 'support' uplift from PLUS Berhad's standalone credit assessment and fundamentally represents MARC's government-related issuer rating on PLUS Berhad.

MARC has analysed PLUS Berhad as a government-related issuer based on its belief that the government will maintain a high indirect shareholding in the issuer for the foreseeable future. The rating agency also took note of the government's high direct and indirect ownership level over the years in the publicly listed PEB. Moreover, the golden share retained by the government in PLUS Berhad provides assurance of the government's continuing involvement in the governance of the company.

PLUS Berhad's standalone credit risk assessment of AA, meanwhile, reflects the following credit strengths: the NSE's history of strong performance and the stability of tolled traffic on the expressway, the trajectory of steady growth in traffic volumes for most of the tolled expressways comprising PLUS Berhad's tolled expressways portfolio, the geographic diversity afforded by the five tolled expressways relative to single asset projects and the company's majority government ownership.

These strengths are tempered by the inherent risks in toll expressway projects which include the sensitivity of traffic volumes to economic cycles and the opening of competing routes, as well as PLUS Berhad's aggressive capital structure. PLUS Berhad's paid-in equity capital will be modest, at RM50 million, relative to the debt in capital structure which includes an additional RM3.35 billion of Redeemable Convertible Unsecured Loan Stocks (RCULS) subordinated to the RM23.35 billion senior sukuk and RM11.0 billion GG Sukuk.

The rating also considers PLUS Berhad's adequate projected finance service coverage ratios during the tenure of the rated sukuk. Its base case projected finance service cover ratios (FSCR) averages 4.72 times with a minimum coverage level of 1.74 times incorporating retained cash.

The two-notch support uplift considers the government's strong track record of providing support to the tolled expressways con cessions that comprise the tolled expressways portfolio of PLUS Berhad as well as the guarantee by the government for the unsecured sukuk to be issued by the company. Apart from guaranteeing the unsecured sukuk to be issued by PLUS Berhad, MARC understands that the government will also waive the repayment of outstanding support loans, grant tax breaks over the tenure of the Sukuk Musharakah Programme and provide financial assistance on funding costs with respect to the Series 2 sukuk.

MARC believes that the government has significant incentives to ensure the financial stability of PLUS Berhad as its tolled expressways portfolio includes key transportation links such as the NSE and the Penang Bridge which are important to the national economy and the promotion of economic development. Equally important are the repercussions if PLUS Berhad were to fail to receive full and timely support from the government when required given the highly leveraged financing structure for the acquisition and cross-default provisions for the secured sukuk.

The stable outlook reflects MARC's assumptions that PLUS Berhad will maintain FSCR levels which are broadly in line with its projections and that the issuer will continue to maintain its strong links with the government.

Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
David Lee, +603-2082 2255 / david@marc.com.my;
Ahmad Tajuddin Yeop Aznan, +603-2082 2256 / tajuddin@marc.com.my;
Jason Kok, +603-2082 2258 / jason@marc.com.my.