Published on 02 Apr 2021.
RAM Ratings has reaffirmed the A1/Stable rating of Projek Smart Holdings Sdn Bhd’s (Smart Holdings or the Company) RM330 mil Islamic MTN Facility (2015/2032) (the Sukuk). The reaffirmation is premised on RAM’s assessment that the Company’s credit metrics will remain supportive of the sukuk rating. This is despite volatile near-term traffic flow amid the COVID-19 pandemic. The Sukuk’s debt coverage and liquidity indicators are supported by the Company’s partially underwritten but unrated RM250 mil Islamic MTN Programme (the unrated sukuk).
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 a stormwater channel and a motorway; its Construction and Concession Agreement (or CCA) spans 40 years from 1 January 2003. From a rating perspective, SMART and Smart Holdings are viewed as a single economic entity as the underlying cashflow to service the Sukuk is derived solely from SMART. The Sukuk’s covenants and restrictions are applicable to both entities.
Unsurprisingly, the Tunnel’s average daily traffic (ADT) plunged 47.9% to 12,967 vehicles in 2020, in line with the implementation of various pandemic-related movement restrictions. As a result, Smart Holdings’ revenue and operating profit before depreciation, interest and tax (OPBDIT) declined substantially. Given the various mobility limitations in place since January, we expect traffic volume to remain pressured in 2021, before a recovery to almost pre-pandemic levels in 2022. Meanwhile, the Tunnel’s traffic volume is also susceptible to the new norm of working from home, which may permanently alter commuting patterns.
Based on RAM’s cashflow analysis, the Sukuk’s FSCR is likely to fall below the 1.70 times threshold for an A1 rating in September 2022 (base case: minimum FSCR of 2.49 times). This blip can be avoided if compensation payments from the Government are promptly received. Incorporating upside potential for SMART’s traffic volume from developments such as TRX and Bandar Malaysia, and balanced by declines after toll-rate increases and the availability of cheaper alternatives (toll-free roads and public transportation), we envisage its average annual ADT to stand at 20,529 vehicles until the Sukuk’s maturity (base case: 42,232 vehicles). This translates into respective minimum and average FSCRs of 1.70 and 1.96 times (with cash balances) for the period (base case: 2.49 and 4.75 times).
Despite the unpredictable traffic flow, the Company’s credit strength and financial flexibility will be boosted by the RM250 mil unrated sukuk (of which RM220 mil is irrevocably and unconditionally underwritten). The latter may be drawn down to service obligations on the Sukuk when they fall due and/or to improve this transaction’s liquidity. We note that the transaction exhibits a steady liquidity profile, with RM47 mil of cash and cash equivalents as at end-December 2020. This will amply cover the RM27 mil of principal and profit payments due on the Sukuk in the next 12 months.
As with most concession-related project financing, SMART Holdings is vulnerable to termination and single-project risks.
Aw Wei Xuan
(603) 3385 2506
(603) 7628 1162
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Ratings on Projek Smart Holdings Sdn Bhd