Friday, Oct 18, 2019
MARC has lowered the ratings of MEX II Sdn Bhd’s RM1.30 billion Sukuk Murabahah Programme and RM150 million Junior Bonds Issuance from AA-IS and A- to AIS and BBB. The rating outlook remains negative.
The ratings have been on negative outlook mainly due to rising completion risk. This was rooted in the increasing uncertainty related to the development of the 16.8-km Lebuhraya KLIA (MEX Extension) project, particularly the completion and associated tolling date.
In July, we reported that MEX Extension was to complete in March 2020, which in itself was already a delay, given that the project was originally scheduled to finish in October 2019. We note that MEX II encountered a setback when a stop work order on the construction of Bridge 13 was issued in April 2019; timely commencement of work on Bridge 13 is deemed critical to the overall project completion. The design documents had to be resubmitted for approval from related government agencies. As a result of the permit delay, the completion date is likely to be pushed back by another four months to July 2020. However, slow progress in the past six months (at 83% as at end-August 2019) remains a serious concern. Any constraints at Maju Holdings Sdn Bhd, the project owner and engineering, procurement and construction contractor, may also impede the timely completion of the project.
The downgrade reflects the lack of project progress, the lengthier delay and the consequent deterioration in the company’s debt-servicing metrics that are no longer consistent with the previous ratings. Based on our assessment, a delay in tolling to after November 2020 could result in MEX II breaching its minimum covenanted finance service coverage ratio of 1.75x.
The continued placing of the ratings on negative outlook reflects MARC’s concern that additional construction delays could result in a greater erosion in MEX II’s financial metrics. Ratings could be downgraded further if MEX Extension continues to have execution issues and its progress does not improve materially over the next three to six months. Evidence that the project is likely to be completed within the current timeline (i.e. by July 2020) and cost parameters, and whether tolling can start by September 2020 could, however, stabilise the outlook.
Meanwhile, the amount outstanding in the Finance Service Reserve Account of RM122.3 million as at end-August 2019 will be able to cover MEX II’s next three profit payments due in October 2019, April 2020 and October 2020, which will ease any pressure on profit obligations over the near term.
Contacts:
Ati Affira Kholid, +603-2717 2941/ affira@marc.com.my;
Hafiza Abdul Rashid, +603-2717 2955/ hafiza@marc.com.my;
Rajan Paramesran, +603-2717 2933/ rajan@marc.com.my