Published on 19 Mar 2021.
RAM Ratings has downgraded the rating of MEX I Capital Berhad’s (MEX Capital or the Company) RM1.35 bil Sukuk Musharakah (2014/2031) (the Sukuk) to C3/Negative, from BB1/Negative. This is premised on the Company’s persistent liquidity problems and heightened default risk amid sharply lower traffic volumes along the Maju Expressway (MEX or the Highway). The downgrade is also prompted by the delays to conclude the planned refinancing exercise.
The COVID-19 pandemic and resultant movement control orders (MCOs) slashed the average daily traffic (ADT) of MEX by 39.1% to only 88,970 vehicles in 2020 (2019: 145,987 vehicles). This had, in turn, severely weakened the earnings and cashflow-generating ability of Maju Expressway Sdn Bhd (MESB, the concessionaire of MEX and the key cashflow source under the transaction). It had also compounded MEX Capital’s already weak liquidity position and credit metrics, thereby accelerating potential default on the Sukuk.
MEX Capital is now concluding its restructuring exercise to refinance the Sukuk. This will include a longer maturity and lower annual principal redemption amounts. It will allow MEX Capital and MESB to replenish their cash coffers for better debt coverage. The exercise is pending the sukukholders’ approval, with financial close targeted by end-June 2021. Delays in completing this exercise are attributable to the negotiations between the sukukholders and MEX Capital over the resolution to refinance, mainly on the yields of the restructured sukuk and settlement of the outstanding legal suit on MEX Capital’s inappropriate advances made in 2018.
As at end-February 2021, the cash holdings of MEX Capital and MESB summed up to RM16.9 mil. With the receipt of the RM22.3 mil government compensation payments in early March 2021 (delayed since early 2020), the upcoming profit obligation of RM26.0 mil due in July 2021 should be comfortably covered. Beyond that, RAM’s sensitised projections indicate a severe deficit in funds to service MEX Capital’s profit and principal payments in January 2022.
Meanwhile, the outlook on the Sukuk remains negative as the Company’s debt servicing ability is still vulnerable to myriad adversities, especially its stressed liquidity position, which heightens default risk if the restructuring exercise is further delayed. Coupled with the Highway’s uncertain traffic patterns, the transaction’s cashflow will not be able to cover the debt obligations falling due within the next twelve months. MEX’s traffic flow is more volatile than that of other urban expressways due to its significant reliance on commuters to/from Kuala Lumpur International Airport (direct connection to Kuala Lumpur city centre). Despite the declining number of coronavirus infections and subsequent traffic relaxation after the MCO 2.0, the Highway’s traffic remains vulnerable to resurgence of infections. Thus, its recovery trajectory is expected to stay volatile in the near term.
The finalisation of the restructuring exercise is thus critical, to avoid missed profit or principal payments under the Sukuk. While its project fundamentals and traffic flow assumptions will remain largely similar, the restructured sukuk is expected to have a longer tenure and a re-tranched profile. This is anticipated to improve its debt coverage metrics.
As with other toll-related transactions, this one is also inherently exposed to regulatory and single-project risks. Any non-monetary compensation for non-revision of tariffs may exert downward pressure on the Sukuk’s rating, especially given the MEX Highway’s steep scheduled rate hikes. Despite occasional delays in compensation payments (as experienced in 2020), however, the Government has not been known to renege on its obligations.
Yip Chee Meng
(603) 3385 2516
(603) 3385 2577
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