Published on 21 Sep 2021.
RAM Ratings has reaffirmed the AAA(bg/fg)/Stable rating of West Coast Expressway Sdn Bhd’s (WCE or the Company) RM1 bil Guaranteed Sukuk Murabahah Programme (2015/2036). The rating reflects irrevocable and unconditional kafalah guarantees extended by Bank Pembangunan Malaysia Berhad (rated AAA/Stable/P1) and Danajamin Nasional Berhad (rated AAA/Stable/P1), which enhance the credit strength of the Sukuk beyond WCE’s standalone credit position. WCE is the concessionaire for the construction, maintenance and financing of the closed tolled section of the 193-km West Coast Expressway (or the Expressway) linking the west coast of Peninsular Malaysia from Banting in Selangor to Changkat Jering in Taiping, Perak.
As at end-May 2021, construction progress of the Expressway stood at 73.22% compared to the budgeted 85.15% (equivalent to a 11 months delay). This was largely due to administrative delays in processing land titles and slow building progress further compounded by the various mobility and operating capacity restrictions imposed during COVID-19 lockdowns. WCE is currently awaiting Malaysia Highway Authority (MHA) approval of further applications for extension of its completion timeline on account of lockdown-related disruptions.
To date, construction of four out of 11 sections – Sections 5,8,9 and 10 – of the Expressway has been completed, with tolling underway. The initial traffic flow has however been scant given that other sections are still under construction as well as owing to the impact of various lockdowns and mobility restrictions imposed since the onset of the COVID-19 pandemic.
We expect the Expressway’s traffic volume to stay suppressed by weak demand amid the pandemic and delays in construction completion in the near term. By assuming a further 6-month delay to the respective completion dates for remaining sections under construction, RAM’s sensitised case projects traffic volume to average 124,000 vehicles per year for 2021-2025, with annual average revenue of RM93.3 mil – significantly lower than the traffic consultant’s expectations.
The RM2.14 bil land acquisition cost to date – of which RM1.76 bil has been paid – has exceeded the Government of Malaysia’s (GoM) allocation of RM980 mil. Although risks of hold-ups in obtaining land rights and a heftier land cost remain, only 5% of private land acquired for the Expressway has yet to go through a land enquiry. WCE is in the midst of legal proceedings to appeal land compensation awards paid in the past, an exercise we expect to be drawn-out.
Based on RAM’s sensitised cashflow analysis, which assumes lower ADT and no recovery from the said appeals, WCE will need shareholder support to fund remaining land and construction costs and finance service obligations from August 2022 onwards. WCE is procuring a RM400 mil reimbursable land costs facility from the GoM to fund its remaining land costs, which will delay any projected shortfalls to February 2023, when finalised.
For the period April 2021 to June 2024 alone, WCE will have to spend a total of RM2.38 bil on land, construction, and financing obligations. The lengthy term of the concession, however, provides room for a refinancing exercise which will be necessary to the Company under our sensitised scenario. The Company’s shareholders – WCE Holdings Berhad and Road Builder (M) Holdings Bhd – have irrevocably and unconditionally committed to providing financial support to ensure the completion of the Expressway, along with up to RM400 mil under a cash-deficiency undertaking.
WCE remains exposed to government policies on infrastructure in view of the sensitivity of toll rate hikes. Following the freeze on the NSE’s tariffs until 2058, the WCE’s toll rate increases – scheduled for its fourth year of operations and every five years thereafter – may come under scrutiny and remain a challenge from a cost perspective. That said, the concession agreement entitles WCE to compensation from the GoM in the event toll rates are not increased as scheduled.
As with most concession-related projects, WCE is vulnerable to regulatory and single-project risks. The construction of the Expressway is undertaken by a consortium known as IJMC-KEB Joint Venture, comprising IJM Construction Sdn Bhd and WCE Holdings Berhad.
Davinder Kaur Gill
(603) 3385 2525
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Ratings on West Coast Expressway Sdn Bhd