Published on 06 Nov 2020.
RAM Ratings has assigned a preliminary A2/Stable rating to MEX I Capital Berhad’s (MEX Capital or the Issuer) proposed RM1.17 bil Islamic Medium-Term Notes (the Proposed Sukuk). The rating is anchored by Maju Expressway’s (MEX or the Highway) project economics as well as the restrictions, limitations and covenants under the transaction. The preliminary A2/Stable rating supersedes the earlier AA3/Stable rating published on 11 June 2020.
While the transaction structure remains broadly unchanged, the debt profile has been re-tranched together with adjustments to yields and traffic assumptions, resulting in the assigned preliminary rating which commensurate with a A2 rating. Given the COVID-19 pandemic and the consequent lockdowns, i.e. the Movement Control Order (MCO) and the Conditional MCO, we have made further downward adjustments to the Highway’s near-term traffic volume. Despite encouraging recovery since the lifting of the MCO in mid-May 2020, traffic flow is envisaged to stay volatile through the next two years. Until a vaccine is found, the resurgence of the coronavirus from time to time will necessitate some form of mobility restrictions, which dampen traffic on highways. The reinstatement of Conditional MCO in the Klang Valley effective 14 October 2020 is a case in point.
The preliminary 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 have incorporated contractions in traffic volume due to the COVID-19 pandemic, 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 in the near future. This may well hinder the recovery of traffic volume as the Highway 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 142,964 vehicles throughout the tenure of the Proposed Sukuk (base case: 197,752 vehicles; actual 2019: 145,986 vehicles).
Having said that, it remains to be seen in the medium to long term whether there is any structural shift in commuting patterns which might affect traffic volume. Nonetheless, with 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 1.70 and 2.23 times (with cash balances) throughout the tenure of the Proposed Sukuk (base case: 2.33 and 6.79 times). Barring any prolonged or recurrent lockdowns amid the pandemic, our stressed traffic assumptions should provide a sufficient cashflow buffer against near-term weakness in traffic volumes.
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 will likely be deferred by the Government. While MESB will receive compensation payments (on average 35% of toll revenue), 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 uncertainties looming over the tolled highway sector. The Government also 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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