Published on 11 Jun 2020.
RAM Ratings has provided an update to the preliminary AA3/Stable rating assigned to MEX I Capital Berhad’s (MEX Capital or the Issuer, formerly known as Bright Focus Berhad) proposed RM1.225 bil Islamic MTN (the Proposed Sukuk) in November 2019. While the transaction structure remains broadly unchanged, revisions have been made to the maturity schedule and yield assumptions. Given the COVID-19 pandemic and the consequent Movement Control Order (MCO), we have also adjusted downwards the Highway’s near-term traffic volume.
The assigned rating is anchored on Maju Expressway’s (MEX or the Highway) project economics as well as the restrictions, limitations and covenants under the transaction that extend to MEX Capital, Maju Expressway Sdn Bhd (MESB) - the concessionaire for the Highway and MEX Capital’s 96.8%-held subsidiary – and their respective shareholders. Maju Holdings Sdn Bhd is the ultimate majority shareholder of both MESB and MEX Capital.
The AA3 rating reflects the favourable alignment of the 26-km Highway, as it is the shortest direct link between Kuala Lumpur (KL) and Putrajaya, Cyberjaya and Kuala Lumpur International Airport (KLIA). Our stressed assumptions incorporate contractions in traffic volume as a result of COVID-19, the MCO and the commencement of MRT Line 2 (Sungai Buloh-Serdang-Putrajaya) in 2022, which runs parallel to the Highway. Travel restrictions and the risk of travel aversion are expected to linger even after the lifting of the MCO. This may well hinder the recovery of traffic volume as the MEX provides a direct route between KL and KLIA. In line with the Highway’s decelerating growth in the last couple of years, we expect its average daily traffic to clock in at 141,065 vehicles throughout the tenure of the Proposed Sukuk (base case: 197,752 vehicles; actual 2019: 145,986 vehicles).
Despite our stressed traffic assumptions, the annual cashflow of the Highway and its projected cash accretion are anticipated to anchor MEX Capital’s steady debt-servicing ability, translating into respective minimum and average projected finance service cover ratios (FSCRs) of 2.29 and 2.93 times (with cash balances) throughout the tenure of the Proposed Sukuk (base case: 3.26 and 12.55 times).
RAM also believes that the structural characteristics of the Proposed Sukuk - prohibition from making distributions to shareholders, no additional debt, limits on expenses, stringent oversight for designated accounts, and largely independent board representation - address concerns about transaction governance and financial discipline, going forward. Nonetheless, a one-notch downward adjustment has been factored into the Sukuk’s rating, given past instances of poor financial management and weak governance.
As in the case of all toll-road concessionaires, this transaction is inherently exposed to regulatory risk. The Highway has steep scheduled toll-rate hikes ahead, but these will likely be deferred by the Government. While MESB will receive compensation payments, it may lose potential revenue as the compensation is capped by the projected traffic volume under its concession agreement; actual highway traffic has already exceeded this. This will be exacerbated by the regulatory and policy uncertainties looming over the tolled highway sector. Unlike borrowings raised by concession companies, the Government has no obligations to MEX Capital’s lenders in the event of termination or expropriation of MESB’s concession. MEX Capital is also vulnerable to single-project risk, but it is unlikely that the entire highway will be disrupted at any particular time.
We highlight that the Proposed Sukuk’s proceeds will be entirely used to refinance MEX Capital’s existing RM1.35 bil sukuk (the Initial Sukuk), the rating of which was last reaffirmed at BB1/Negative in April 2020. The Initial Sukuk’s rating has been progressively downgraded over the years due to deteriorating credit fundamentals.
Yip Chee Meng
(603) 3385 2516
Davinder Kaur Gill
(603) 3385 2525
(603) 3385 2577
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