MARC has placed all issue ratings in its toll road universe on MARCWatch Developing. The driver for placing the ratings on MARCWatch Developing is the increased near-term uncertainty pending full clarity on the new government’s exact plans to deliver pre-election commitments on the scrapping of toll road charges. MARC currently rates 10 toll concessionaires with an aggregate outstanding of RM33.1 billion. The list of MARC-rated toll concessionaires in its universe is shown below:

Toll concessionaire	Issue	Rating:
Grand Sepadu (NK) Sdn Bhd	RM210.0 million Sukuk Murabahah	AA-IS
Cerah Sama Sdn Bhd	RM750.0 million in nominal value IMTN (Sukuk) Programme	AA-IS
Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd	RM2.3 billion IMTN Programme (Sukuk Musharakah) RM180.0 million Redeemable Secured Junior Bonds	AA-IS A-
Sistem Penyuraian Trafik KL Barat Sdn Bhd	RM510.0 million BaIDS	A+IS
ANIH Berhad	RM2.5 billion Senior Sukuk Musharakah Programme	AAIS
Senai-Desaru Expressway Bhd	RM1.89 billion IMTN Programme	BBB-IS
Projek Lebuhraya Usahasama Bhd	RM23.35 billion Sukuk Musharakah Programme	AAAIS
MEX II Sdn Bhd	RM1.30 billion Sukuk Murabahah Programme RM150.0 million Junior Bonds	AA-IS A-
Lebuhraya Duke Fasa 3 Sdn Bhd	RM3.64 billion in nominal value Sukuk Wakalah	AA-IS
Projek Lintasan Sungai Besi - Ulu Klang Sdn Bhd	RM2.0 billion Sukuk Wakalah Programme RM500.0 million Danajamin-Guaranteed Facilities	A+IS(s) AAAIS(fg)

 MARC notes that toll roads have historically played an important role in bridging the funding gap for road infrastructure needs in Malaysia. Large-scale greenfield toll road concession projects with demand risk have been mainly financed with bonds and sukuk. A defining characteristic of domestic toll concessionaires is the high proportion of project bonds or sukuk in their capital structure. The importance of toll revenue as a funding source for infrastructure construction and maintenance has risen over the years.

MARC observes that in more recent periods, concession tenures were extended to compensate concessionaires for toll revenue losses arising from the abolition of tolls at selected toll collection points and the deferment of scheduled toll hikes. Notwithstanding these measures, the government’s annual cash compensation commitments pursuant to deferred toll hikes have remained sizeable in aggregate. For a significant number of project bonds and sukuk in MARC’s toll road universe, the timely implementation of scheduled toll hikes and/or payment of cash compensation for toll hike deferments is referenced as an important recurring rating consideration.

MARC believes that the approach the government will take to abolish tolls would be to minimise the impact on public finances and forestall any untoward effect on capital markets. Nonetheless, the lack of historical precedents suggests that the eventual course of action chosen will be a test of public-private partnerships for project owners, debt holders and the public sector, and may impact other segments of infrastructure financing. Available options include an early termination of the affected concessions and the renegotiation of concessions possibly involving the conversion of the “user pays” toll roads to long tenure shadow toll roads in which no actual tolls are collected from the public.

MARC will update its analysis after announcements on the abolition of tolls are made by the government. The “Developing” designation of our MARCWatch conveys the uncertainty around the credit trajectory of the affected issuers arising from the proposed abolition of road tolls.

Contacts:
Chia Kah Yie, +603-2717 2961/ kahyie@marc.com.my;
Lim Chi Ching, +603-2717 2963/ chiching@marc.com.my;
David Lee, +603-2717 2955/ david@marc.com.my.