Published on 23 Apr 2020.
RAM Ratings has lifted the Negative Rating Watch on MEX I Capital Berhad’s (MEX Capital, formerly known as Bright Focus Berhad) RM1.35 billion Sukuk Musharakah (2014/2031) (the Sukuk) and reaffirmed its BB1 rating with a negative outlook. The Rating Watch, in place since June 2019, was anchored on concerns of an imminent default risk. On 24 May 2019, a Letter of Demand was served by the sukuk trustee (on behalf of the sukukholders) to MEX Capital’s key subsidiary, Maju Expressway Sdn Bhd (MESB). The demand notice required MESB to return any prohibited advances made to its ultimate holding company – Maju Holdings Sdn Bhd – within a 30-day period. Failure to do so entitled the sukukholders to declare a Dissolution Event, akin to a default, under the Sukuk.
The Rating Watch has been lifted as the sukukholders have not exercised their right to call a Dissolution Event to date, while a corporate exercise to refinance the Sukuk is ongoing and continues to make significant progress. Notwithstanding the above, we have revised the rating outlook to negative, premised on persistent downward rating pressure on the Sukuk in the near term.
Apart from lingering legal risk, we remain concerned with traffic underperformance risk this year, given the extended Movement Control Order (MCO) by the Government of Malaysia and potential aversion to travel even after the MCO is lifted. As the MEX Highway (the Highway) provides direct connectivity to the nation’s main international airport, Kuala Lumpur International Airport, any prolonged travel restrictions will continue weighing on its traffic. As it stands, average daily traffic for the month of March 2020 had declined 41% from the preceding month, following the implementation of MCO starting from 18 March 2020. The transaction remains exposed to the extent of MCO and pace of recovery after the travel restrictions are lifted. Longer-term implications on traffic demand even after the MCO is lifted remains to be seen, depending on factors such as shift in preference towards ‘work from home’ and suppressed user demand arising from worsening unemployment and market turmoil.
Given MEX Capital’s already impaired debt-servicing ability prior to the MCO, any further loss in earnings is likely to exacerbate its weak liquidity position and credit metrics. Over the longer term, the MEX Highway is also susceptible to user migration to the MRT Line 2, which runs parallel to the Highway, once it comes on stream in 2022. In addition, past concerns on escalating costs and lapses in corporate governance practices continue to add rating pressure.
MEX Capital’s and MESB’s operational and financial performances in 2019 exceeded RAM’s projections, due to the early receipt of compensation payments and the MEX Highway’s stable traffic profile. That said, our forward-looking “stress scenario” analysis continues to indicate deteriorating debt-servicing indicators and suggests a potential default by January 2023. The weak liquidity position at MESB and MEX Capital following large advances made in 2018, expanding annual principal repayments under the Sukuk over the next few years, traffic weakness and likelihood of delays in annual compensation receipts, indicate heightening liquidity risk for the transaction. The likelihood of a downward rating movement over the next 12 - 15 months is high if the Sukuk is not refinanced and the Highway experiences severe earnings decline stemming from MCO and Covid-19.
To this end, MEX Capital has commenced a restructuring exercise to refinance the Sukuk that will include a longer maturity tenure and lower annual principal redemption amounts. This will allow MEX Capital and MESB to rebuild their cash reserves to support a better debt coverage profile. The restructuring and refinancing exercise is pending sukukholders’ approval while financial close is targeted by end-July 2020.
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 MEX Highway’s steep rate hikes. That said, compensation payments have been received, albeit delayed.
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