Published on 18 May 2020.
RAM Ratings has revised the rating outlook on Projek Smart Holdings Sdn Bhd’s (Smart Holdings or the Company) Islamic MTN Facility of up to RM330 mil in nominal value (2015/2032) (the IMTN), from negative to stable. Concurrently, we have reaffirmed the IMTN’s rating at A1. The revision in outlook is largely premised on the improvement in the Company’s liquidity from the setting up of a partially underwritten RM250 mil Islamic MTN Programme (unrated sukuk) in November 2019.
Smart Holdings is the sole shareholder of Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (SMART), the concessionaire for the Stormwater Management and Road Tunnel Project (SMART Tunnel or the Tunnel). The Tunnel comprises the Stormwater Channel and Motorway; the construction and concession agreement (or CCA) spans 40 years from 1 January 2003.
To recap, the Tunnel’s traffic volume has declined significantly following its maiden toll-rate hike in October 2015. This has led to a mismatch between its annual cashflow-generation and debt repayment requirements from fiscal 2023 onwards, when the principal amortization of the IMTN is expected to spike. In turn, this has necessitated a partial refinancing exercise via the issuance of the RM250 mil unrated sukuk, to ease the pressure on its liquidity.
Available for drawdown in accordance to a pre-determined schedule, which broadly matches the principal amortization of the IMTN, the unrated sukuk has shored up Smart Holdings’ finance service coverage ratio (FSCR). Up to RM220 mil of the unrated sukuk is irrevocably and unconditionally underwritten by an institutional investor. While the unrated sukuk is ranked pari passu with the IMTN, its repayment will only commence after the maturity of the IMTN.
Our analysis, which includes a cumulative RM100 mil of drawdown under the unrated sukuk, indicates that the Company will register respective minimum and average FSCRs of 1.83 and 2.14 times (with cash balances). These are commensurate with the benchmarks for an A1 rating.
The Tunnel’s traffic flow registered a second year of growth in 2019 (with a 10.31% rise in ADT) after consecutive annual declines in traffic volume since October 2015 as a result of a reduced diversion in traffic. Nevertheless, traffic flow for the Tunnel in 2020 is envisaged to be constrained by the COVID-19 outbreak, including a steep decline during the Movement Control Order (MCO) period and a gradual recovery since the conditional MCO has come into effect. Despite this, the Company’s debt-servicing ability is anticipated to stay intact under our sensitised scenario of a 25% revenue reduction. Over the longer term, the Tunnel’s traffic performance is expected to remain challenged by the Government’s ongoing efforts to improve Malaysia’s public transportation infrastructure. The completion of the Klang Valley Mass Rapid Transit 2 Sungai Buloh-Serdang-Putrajaya line in 2022 could divert traffic from the Tunnel. Coupled with the Tunnel’s scheduled steep tariff increases, we expect its average daily traffic to come in at 23,933 vehicles throughout the remaining tenure of the IMTN, under our sensitivity analysis (2019: 24,887 vehicles).
SMART and Smart Holdings are viewed as a single economic entity because the underlying cashflow to service the latter’s IMTN is derived solely from the former. SMART’s liabilities are limited to the advances due to Smart Holdings, which have been structured back-to-back with Smart Holdings’ obligations under the IMTN. The rating focuses on the aggregate entity’s FSCR, which includes the cash holdings of both SMART and Smart Holdings, against principal and profit payments under the IMTN as well as profit of the unrated sukuk.
While the Government had previously proposed to acquire the SMART Tunnel from its ultimate shareholders, no further extension has been granted after the expiry of the cut-off date. Negotiation and finalisation of the terms of the definitive agreements had originally been expected to be concluded by 31 December 2019, before being extended to 29 February 2020.
Aw Wei Xuan
(603) 3385 2506
(603) 7628 1162
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Ratings on Projek Smart Holdings Sdn Bhd