Published on 04 Nov 2020.
RAM Ratings has reaffirmed the C2/Stable rating of Lebuhraya Kajang-Seremban Sdn Bhd’s (LEKAS or the Company) RM633 mil Junior Sukuk Istisna’ (2007/2025). The Company holds the concession for the 44 km Kajang-Seremban Highway (the Highway) until May 2039. The rating takes into consideration the high likelihood of default on the Junior Sukuk, as well as its deep subordination to the Company’s other debt obligations, i.e. its Redeemable Convertible Secured Islamic Debt Securities (RCSIDS) and Syndicated Term Loan (STL).
Following a debt-restructuring exercise in October 2013, repayments on the Junior Sukuk are not permissible until the STL and the RCSIDS have been fully settled. Given the mismatch between LEKAS’s annual cash-generating capacity and the lumpy one-off repayment on the RCSIDS, we maintain our view that the Company will have to refinance the RCSIDS upon maturity in April 2023.
The Highway’s traffic volume improved 5.43% in FY Mar 2020, with an ADT of 78,080 vehicles. Following the implementation of the Movement Control Order (MCO), however, its traffic flow plunged 54.2% y-o-y in 1Q FY Mar 2021 while revenue halved to RM10.4 mil. With the anticipated gradual recovery in monthly traffic flow, the Highway’s overall traffic volume had rebounded to pre-lockdown levels as at end-September 2020.
Traffic volume has been facing downward pressure since October 2020 due to the reinstatement of the Conditional MCO (or CMCO). LEKAS’s credit health amid this pandemic mainly hinges on the duration of the CMCO and the severity of reduced cashflow, which remains volatile. Mobility restrictions and the resurgence of COVID-19 cases may deepen the losses of the Highway.
Following an 18% downward adjustment of the North-South Expressway’s (NSE) tariffs in February 2020, the rate difference per km between the Highway and the NSE for closed-toll stretches now stands at 62%. Given the rate freeze for the NSE until 2058 and the Highway’s 10% upward tariff adjustment every three years as per its CA, the latter faces potential downward pressure on its long-haul traffic volume. This is because price-sensitive users are likely to choose alternative routes due to the widening tariff disparity in the coming years.
Notably, a potential default on the last tranche of the STL repayments may stem from the risk of 1-year delayed compensation from the Government of Malaysia (GoM) and thinner-than-expected traffic flow as well as recovery. The Company may conduct a refinancing exercise prior to the potential default. In any case, the STL’s terms and conditions include an irrevocable RM25 mil BG procured by IJM Corporation Berhad (LEKAS’s shareholder) in favour of the STL holders. Moreover, LEKAS has already received the 50% of the balance for 2018, a full year’s compensation for 2019 and advance payment for 2020. We expect the GoM to keep honouring the spirit of the concession agreement vis-à-vis compensations in the event of non-revision of toll rates, as observed to date.
Similar to most concession-related projects, LEKAS is exposed to single-project and regulatory risks.
Toh Wei Liang
(603) 3385 2620
(603) 3385 2577
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.
Published by RAM Rating Services Berhad
© Copyright 2020 by RAM Rating Services Berhad
Ratings on Lebuhraya Kajang Seremban Sdn Bhd