Bright Focus

Published on 03 Jun 2019.

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RAM Ratings has downgraded the rating of Bright Focus Berhad’s RM1.35 bil Sukuk Musharakah (2014/2031) to BB1 from A1. Concurrently, the rating has been put on Rating Watch, with a negative outlook. The downgrade is premised on the severe impairment in Bright Focus’ debt-servicing metrics following further unanticipated advances by its 96.8%-held subsidiary – Maju Expressway Sdn Bhd (MESB or the Company) – to the ultimate parent company (Maju Holdings Sdn Bhd), in addition to a deterioration in MESB’s projected annual cashflow.

The unanticipated advances – although disallowed under the Sukuk’s transaction terms – have severely depleted the cash balances of MESB, the concessionaire for the Maju Expressway (MEX) and the sole source of cashflow supporting the repayment of the Sukuk. Additional advances summing up to RM24.82 mil have been paid to the Group’s ultimate shareholder between September and November 2018. These advances followed an earlier RM73 mil made in June 2018, which was reason for the prior rating downgrade from AA2 to A1. The continued breach of the financing terms of the Sukuk highlights concerns over areas of financial management policies and corporate governance.

The negative Rating Watch, meanwhile, is premised on the legal action being pursued by the trustee (on behalf of the sukukholders), to recover the RM97.02 mil of advances in 2018. On 24 May 2019, a letter of demand was sent to MESB, requiring the Company to return all prohibited advances to date and to reinstate its cash position within the next 30 days, failing which the sukukholders would be entitled to exercise their right to declare a dissolution event (similar to an event of default). Should a dissolution event be declared, the sukuk rating will be downgraded to D.

The significantly depleted cash reserves of MESB are exacerbated by the variability of the Group’s financial projections vis-à-vis cost increases, on top of the persistent delays in scheduled toll rate hikes for the MEX. These factors contribute to the instability and uncertainty of the Group’s annual cashflow and debt-servicing metrics, as measured by its finance service coverage ratio (FSCR, with cash balances, post-distribution). Based on our current assessment, which incorporates the Group’s diminished cash holdings and the projected weakening of its annual cashflow, its minimum FSCR (with cash balances, post-distribution) is envisaged to deteriorate to 1.27 times against our earlier projection of at least 1.70 times. 

In the immediate term, MESB’s performance remains vulnerable to escalating operational costs. It is also sensitive to the Government of Malaysia’s (GoM) decisions on toll rate movements. The Company’s compensation receipts are constrained by the projected traffic volume under its concession agreement, as two of its three toll plazas already exceed these projections. A delay in MESB’s toll rate hike to 2021 (from RAM’s previous assumption of 2020) would reduce its projected revenue by RM39 mil in 2020. Bright Focus and MESB are also likely to incur unexpected tax expenses in 2019, following a query from the Inland Revenue Board (IRB) under the latter’s Special Programme for Voluntary Disclosure. MESB has also factored in an additional RM10 mil of operational and repaving costs in 2019. All these may exert further pressure on the Group’s already weak debt-servicing capacity.

The eroded cash balances of both MESB and Bright Focus have also rendered them unable to meet the minimum required balances for their Finance Service Reserve Account (FSRA) and Finance Service Account (FSA) in December 2018 and January 2019, respectively. Notably, the Group restored the minimum required balances for both accounts on 7 May 2019, following compensation payment from the GoM in April 2019. MESB had also not been able to meet its covenanted FSCR of at least 1.75 times as at end-2018. To date, no dissolution event has been declared and no waiver has been granted by the sukukholders, despite the breach of covenants beyond the remedy period.

While the Group’s toll revenue and expenses were within expectations in fiscal 2018, the MEX’s traffic volume increased at a slower rate last year, particularly due to declining traffic at the Salak South toll plaza. We understand that the severe congestion along Jalan Tun Razak due to regular re-routing amid the ongoing development of Tun Razak Exchange has been constraining access to and from the Highway. We expect traffic volume to gradually recover after the completion of the said construction work, although the opening of the Klang Valley Mass Rapid Transit Line 2 – scheduled in 2022 – could prompt traffic migration from the MEX.

The sukuk rating and the Group’s debt-servicing ability remain highly vulnerable to myriad adverse factors, including the possible recurrence of advances, the deferment of tariff increases beyond our assumption of 2021, continued increases in MESB’s expenses, the underperformance of traffic volume, prolonged delays in the receipt of compensation for non-revision of toll rates, and the possibility of heftier tax payments by the Group. To this end, Bright Focus has indicated its intention of undertaking a restructuring exercise. As these plans are still fluid, we have not factored this into our assessment.

RAM’s Rating Watch highlights a possible change in an issuer's sukuk rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated sukuk under special surveillance by RAM. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and profit.

Issues will appear on RAM’s Rating Watch when some of the above events are expected to occur or have occurred. Appearance on RAM’s Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

 

Analytical contact
Chin Wynn, CFA
(603) 3385 2515
chinwynn@ram.com.my

Davinder Kaur Gill
(603) 3385 2525
davinder@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
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.

RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.

Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

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