Press Releases MARC AFFIRMS ITS BBB-IS RATING ON SENAI-DESARU EXPRESSWAY BERHAD’S RM1.89 BILLION ISLAMIC MEDIUM-TERM NOTES PROGRAMME

Tuesday, May 12, 2015

MARC has affirmed its rating of BBB-IS on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes (Restructured Sukuk) Programme with a stable outlook. The affirmed rating reflects Senai-Desaru Expressway’s (SDE) satisfactory traffic performance in line with revised projections, and SDEB’s improved cash flow coverage from the accommodative amortisation schedule put in place under the programme. The rating is mainly constrained by the lack of catchment areas along key stretches of the SDE that limits traffic growth prospects and the heavy reliance on planned developments to spur traffic growth on the highway as well as SDEB’s weak leverage metrics.   

SDEB operates the 77-kilometre SDE under a concession which was extended by 15 years to July 2053 from the original 33 years (from July 2005 to July 2038). The SDE links Senai, Ulu Tiram, Cahaya Baru and Desaru, including a connecting highway from Cahaya Baru to Pasir Gudang in south Johor. For 2014, traffic volume on the SDE rose by 9.5% year-on-year to 248.5 million passenger car unit-kilometres (pcu-km) (2013: 227.0 million pcu-km), a 2.2% increase over the projected traffic volume for the year. MARC notes that the traffic volume benefitted from the double-digit traffic growth on the Senai-Ulu Tiram stretch, which is the largest traffic contributor, as well as from higher recreational traffic to Desaru. However, the Cahaya Baru-Pasir Gudang stretch remains underutilised despite the heavy traffic congestion on the alternative roads between the towns. The lacklustre performance supports MARC’s view that given the availability of toll-free alternatives, the growth of inter-urban toll road usage would remain challenging. Over the medium-term, SDE’s traffic growth catalyst is expected to be the RM89 billion Refinery and Petrochemical Integrated Development (RAPID) project in Pengerang that is scheduled to commence commercial operations in 2019.

For the first eight months of financial year ending June 30, 2015 (8MFY2015), SDEB recorded revenue of RM32.9 million on the back of overall traffic improvement (FY2014: RM44.9 million). Cash flow from operation (CFO) of RM14.4 million for 8MFY2015, while marginally short of projections by RM1.6 million due to higher repair and maintenance expenses, was sufficient to cover the finance service obligations of RM6.6 million in the corresponding period. CFO interest coverage improved to 2.71 times largely due to lower profit payments during the early tenure of the rated programme (FY2014: 1.56 times). MARC expects the back-ended financing structure under the Restructured Sukuk to provide headroom for SDEB to strengthen its liquidity position and maintain compliance with the covenanted Finance Service Cover Ratio (FSCR) of 1.25 times.

While under the revised base case cash flow projections SDEB is expected to have a minimum and average post-distribution FSCR of 1.95 times and 2.51 times respectively, MARC’s sensitivity analysis indicates that SDEB can withstand a maximum traffic underperformance of 7.4% throughout the sukuk tenure before breaching the FSCR covenant in FY2047. In addition, any delay in the commercial operation date of the RAPID project would affect traffic growth prospects and impact SDEB’s ability to build up sufficient cash flow for debt service. SDEB’s debt service ability also relies heavily on the scheduled toll hike, or timely compensation from the government in the event of toll hike deferral. While SDEB has been receiving timely government compensations, MARC highlights that any prolonged delay in receiving government compensation would result in SDEB defaulting on the Restructured Sukuk. In addition, if the company were to undertake the widening works as required under the supplemental concession agreement, SDEB would default on the Restructured Sukuk in FY2017.

MARC notes that under Appendix R of the supplemental concession agreement, the company would need to undertake the first widening works on the Cahaya Baru-Pasir Gudang and Ulu Tiram-Cahaya Baru stretches in 2016 and 2017 respectively or when traffic on the relevant stretches exceeds 70,000 vehicles per day, whichever is earlier. SDEB has applied to the Ministry of Works for a deferment on the road-widening works as the traffic volume has not reached the required service levels. Sukukholders have granted SDEB a five-month extension to June 30, 2015 to obtain approval from the government; MARC expects the company to seek sukukholders’ further indulgence for an extension if government approval is not obtained by the date. 

The stable outlook on the rating reflects the rating agency’s expectations that SDEB’s low debt service requirements over the next two years will lead to an improvement in its cash flow coverage, supported by satisfactory traffic performance and timely receipt of government compensations in lieu of toll hikes. MARC also expects SDEB to be granted an extension by the sukukholders in the event the amendment of Appendix R is not completed by June 30, 2015. Any deviations from these assumptions may result in a revision of the rating and/or outlook.


Contacts:
Ng Chun Kean, +603-2082 2230/ 
chunkean@marc.com.my;
David Lee, +603-2082 2255/
david@marc.com.my.