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RAM Ratings downgrades Bright Focus
Published on 16 Nov 2018.
RAM Ratings has downgraded the rating of Bright Focus Berhad’s RM1.35 billion Sukuk Musharakah (2014/2031) to A1/Negative, from AA2/Negative. This is premised on the unexpected deterioration in Bright Focus’ cash reserves and, in turn, its debt-servicing indicators following a RM73 million advance from subsidiary Maju Expressway Sdn Bhd (MESB) to its ultimate shareholder, Maju Holdings Sdn Bhd, in June 2018. The advance represents a breach of the financing terms of the Sukuk, under which MESB is prohibited from making advances to any related entities except Bright Focus. This marks the third of a series of unexpected payments and expenses incurred by MESB in the last few years, and raises concerns about lapses in the corporate governance and financial management of both Bright Focus and MESB (collectively referred to as “the Group”).
In 2015, MESB – the concessionaire of the Maju Expressway (MEX or the Highway) – made unexpected cash payouts amounting to RM46 million to Maju Holdings, in relation to variation orders (VOs) for the construction of the Seri Kembangan Link of the MEX. After the confirmation of the VOs by the appointed engineers, RM20 million had been returned to the Group. Separately, MESB’s expenses (including opex, capex, heavy repairs and other expenses) for 2016 and 2017 were higher than its estimates during the initial rating exercise. If left unchecked, this may exert further pressure on the rating. Given the aforementioned concerns, we have maintained the negative outlook on the rating.
Our concerns are exacerbated by potential declines in traffic volume for the MEX following the steep scheduled toll-rate hikes over the next five years, as well as competition stemming from upcoming alternatives such as the Klang Valley Mass Rapid Transit Line 2 and the Sungai Besi-Ulu Klang Elevated Expressway. In the meantime, the MEX continues to benefit from its favourable alignment, serving the commercial centres of Kuala Lumpur (KL), Putrajaya, Cyberjaya and KL International Airport. The Highway’s average daily traffic (ADT) increased 6.4% y-o-y to 142,898 vehicles in 2017, followed by another 3.1% y-o-y to 145,207 in 8M 2018.
As at end-July 2018 (close to the Sukuk’s latest profit payment date of 24 July 2018), the Group registered a finance service coverage ratio (FSCR, with cash balances, post-distribution) of 1.96 times, substantially below our projected 2.69 times due to the unanticipated RM73 million advance made the previous month. RAM’s sensitised cashflow analysis incorporates contractions in traffic volume due to the assumption of steep toll-rate hikes over the next five years, delays in the receipt of compensation, higher expenses and the absence of a reimbursement for the RM73 million advance. Based on this, the Group’s debt-servicing ability is envisaged to be adequate, with minimum and average FSCRs (with cash balances, post-distribution and calculated on payment dates) of 1.70 and 2.46 times, respectively, throughout the remaining tenure of the Sukuk.
As with other toll-road concessionaires, the Group is inherently exposed to regulatory and single-project risks. Any non-monetary compensation for non-revision of toll rates may exert downward pressure on the sukuk rating, especially given the MEX’s steep toll-rate increment.
Analytical contact
Chin Wynn, CFA
(603) 7628 1170
chinwynn@ram.com.my
Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
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