Published on 28 Nov 2019.
RAM Ratings has assigned a preliminary AA3/Stable rating to MEX I Capital Berhad’s (MEX Capital or the Issuer, formerly known as Bright Focus Berhad) RM1.225 bil Islamic MTN (the Proposed Sukuk). The Issuer will also set up a RM2.1 bil Subordinated Islamic MTN (the Subordinated Sukuk) as part of the financing transaction. The underlying cashflow to service the Proposed Sukuk is solely derived from MEX Capital’s 96.8%-held subsidiary, Maju Expressway Sdn Bhd (MESB) - the concessionaire for the Maju Expressway (MEX or the Highway). Accordingly, RAM’s analysis focuses on the Highway’s project economics besides the restrictions, limitations and covenants under the transaction that extend to MEX Capital and MESB as well as their respective shareholders.
The preliminary rating is anchored by the Highway’s strong projected annual pre-financing cashflow, which translates into respective minimum and average projected finance service cover ratios (FSCRs) of 2.63 and 3.28 times (with cash balances) throughout the tenure of the Proposed Sukuk (base case: 2.88 and 11.01 times). While the FSCR without cash balances will dip below 1 time and cash accumulation is crucial, this risk will be moderated as MEX Capital is prohibited from making any distribution under the transaction. It should also support stronger FSCRs throughout the life of the Proposed Sukuk as the transaction deleverages.
The Highway benefits from its favourable alignment and position as the shortest direct link between Kuala Lumpur (KL) and Putrajaya, Cyberjaya and KLIA. Despite weakness at the Salak South toll plaza in the last two years due to congestion along Jalan Tun Razak, traffic growth prospects remain encouraging. Our stressed assumptions incorporate contractions once MRT Line 2 (Sungai Buloh-Serdang-Putrajaya), which runs parallel to the Highway, becomes operational in 2022 and during periods of toll-rate hikes. We expect the Highway’s average daily traffic to average 141,068 vehicles throughout the tenure of the Proposed Sukuk (base case: 197,752 vehicles; actual 10M 2019: 144,920 vehicles).
RAM’s rating assessment is also premised on expectations that the proceeds from the Proposed Sukuk will be used to refinance outstanding amounts of MEX Capital’s existing RM1.225 bil Sukuk Musharakah (the Initial Sukuk), ahead of its next principal redemption in January 2020. The Initial Sukuk’s BB1 rating is currently under negative Rating Watch, underpinned by MEX Capital’s severely impaired debt-servicing indicators resulting from RM97.8 mil of unanticipated advances by MESB to Maju Holdings, a deterioration in MESB’s projected annual cashflow and the notice of demand sent to MESB and MEX Capital on 24 May 2019 for the return of the advances. Meanwhile, legal risk persists as the sukukholders attempt to recover the sizeable advances. Nonetheless, the risk of triggering an event of default under the Initial Sukuk is low given that it will likely be refinanced and MESB’s recovery prospects are weak under a termination scenario. Case management in relation to the notice of demand last took place on 27 November 2019; a court hearing has been fixed for 21 January 2020.
More importantly, given the concerns about transaction governance and financial discipline vis-à-vis the Initial Sukuk, RAM believes that the structural and legal characteristics of the Proposed Sukuk adequately address these risks. These include limits on distributions to shareholders, additional debt, limits on expenses, stronger oversight and governance over designated accounts, consolidation of MESB’s residual cash balances through MESB’s subscription of the MEX Capital’s Subordinated Sukuk and independent board representation. The deed of mutual covenants signed amongst transaction parties will further safeguard the transaction’s integrity and governance and align the interests of all parties.
In October 2015, MESB voluntarily relinquished its right to build and maintain the Spur Link – a 17 km road that will begin at the Putrajaya Interchange and terminate at KLIA – to Maju II Sdn Bhd (MEX II). As the Spur Link toll plaza will shift away traffic from the Highway’s Putrajaya toll plaza, the signing of a Toll Collection Agreement with MEX II is imperative to preserve MESB’s projected earnings from its Putrajaya toll plaza. The Proposed Sukuk includes conditions precedent to the agreement formalisation. Meanwhile, the issue of the additional tax to be paid by MESB and MEX Capital under the IRB’s voluntary disclosure programme earlier this year has been resolved; the agreed amount of RM3.75 mil was paid in June 2019.
As with other toll-road concessionaires, the transaction 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 hikes. That said, compensation payments have been received, albeit delayed. Unlike borrowings raised by concession companies, the Government would have no obligations to MEX Capital’s lenders should MESB’s concession be terminated or expropriated. Where Maju Holdings’ offer to acquire PLUS Malaysia Berhad is concerned, we understand that all offers for PLUS are still being considered by the Government. While it is unclear how this particular offer will affect the strategy for the Highway, the transaction terms prohibit any change in shareholders for MESB and MEX Capital. Such a change will require approval from the relevant lenders.
Davinder Kaur Gill
(603) 3385 2525
Yip Chee Meng
(603) 3385 2516
(603) 3385 2577
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