Published on 24 Jun 2022.
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 rating has been reaffirmed on the expectation that the transaction’s medium to long-term credit metrics will improve on the back of continued traffic and earnings recovery post-pandemic. This is after RAM’s expectation of near-term, and temporary, weakening of debt coverages. Lending transaction credit support is the Company’s RM250 mil unrated sukuk (under which RM230 mil remain available) which it can issue to refinance the Sukuk principal repayments as they come due, subject to a predetermined annual limit.
Syarikat Mengurus Air Banjir & Terowong Sdn Bhd (SMART) is among four highway concessionaires in Klang Valley to be acquired by Amanat Lebuhraya Rakyat Berhad (ALR) as part of the government’s plan to restructure Malaysia’s highway sector, as announced on 4 April 2022. While RAM’s cashflow assessment for this review is based on the Sukuk’s current repayment profile and SMART’s prevailing Construction and Concession Agreement (CCA), it is highly likely that the Sukuk will be fully redeemed over the next few months, considering the advanced stage of the sale of SMART to ALR.
As of end-April 2022, supplemental concession agreements (SCAs) had been inked to facilitate ALR’s buyout of the concession companies and is conditional upon the successful fulfillment of the SCAs’ condition precedents, including the concessionaires’ shareholders acceptance of the acquisition offers. The SCAs extend the tenures of the concessions, freeze toll rate hikes and cease government compensation for non-revision of rates. Meanwhile, terms of the draft share sale and purchase agreements have been finalised and are currently pending execution. Nevertheless, our analysis is based on the remote possibility that the ALR transaction fails to materialise and the existing CCAs remain in effect.
Smart Holdings is the sole shareholder of SMART, the concessionaire for the Stormwater Management and Road Tunnel Project (SMART Tunnel or the Tunnel). The CCA for SMART Tunnel – comprising a stormwater channel and a motorway – 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. Covenants and restrictions under the Sukuk are applicable to both entities.
The last two years were a strain on the Tunnel’s traffic and earnings. Traffic trends in early fiscal 2021 took a turn for the worse on the back of Movement Control Order (MCO) 3.0 beginning 12 May 2021. As a result, the Tunnel’s average daily traffic (ADT) contracted by 32% to 8,761 vehicles in FY Dec 2021 (FY Dec 2020: 12,967 vehicles) – half the level projected by RAM. Consequently, Smart Holdings’ operating profit before depreciation, interest and tax continued to weaken (FY Dec 2020: RM12.05 mil; FY Dec 2021: RM4.39 mil). The Company registered finance service coverage ratios (FSCRs, with cash balances, calculated on payment dates) of 1.68 times and 1.64 times, respectively, on 30 September 2021 and 31 March 2022, which were below RAM’s expectations.
The rebound in traffic following the country’s transition to endemicity beginning 1 April 2022 has been encouraging. ADT for the final week of April and the second week of May respectively reached 21,573 vehicles (89% of pre-pandemic levels, i.e. FY Dec 2019) and 21,899 vehicles. Based on recent vehicle counts, we expect ADT to gradually recover, returning to pre-pandemic levels by 2025.
Our sensitised cashflow analysis indicates two occasions – September 2022 and March 2023 – when the Company’s FSCR is expected to fall below the 1.70 times required for an A1 rating (between 1.45 times and 1.55 times). However, we view these dips to be temporary, expecting Smart Holdings’ debt repayment profile to be restored to levels commensurate with the rating from September 2023 onwards. Our analysis assumes continued traffic recovery post MCOs with traffic returning to pre-pandemic levels by 2025. We also assume SMART receives timely government compensation in lieu of the government’s expressed intention for a toll-rate freeze. Taking into account the potential diversion of commuters to cheaper alternatives (toll-free roads, other expressways and public transportation), we assume an ADT of 25,715 vehicles throughout the Sukuk’s tenure (base case: 30,899 vehicles).
Debt coverage and liquidity indicators of the RM330 mil transaction are supported by the Company’s partially underwritten RM250 mil unrated sukuk (RM220 mil of which is irrevocably and unconditionally underwritten). The latter will be drawn down to service obligations on the Sukuk when they fall due. On top of the RM20 mil drawn to date, our stressed assumption incorporates further drawdowns including RM30 mil between 2022 and 2023 as permitted by the financial documents.
As of end-March 2022, the transaction’s cumulative cash pile stood at RM17.9 mil, which is inadequate vis-a-vis the sukuk repayment of RM23.35 mil due in September 2022. The balance in Smart Holdings’ finance service reserve account (FSRA) was also below the covenanted minimum. Nevertheless, as represented by the management to sukukholders, the Company’s FSRA balances should sufficiently cover the profit payment due in September 2022, while the RM200 mil underwritten and undrawn balance on the unrated sukuk programme will be utilised to refinance the principal repayment. Payment default risk is therefore deemed low.
As with most concession-related project financing, the transaction is vulnerable to termination and single-project risks.
Seri Nuralya Munawir
(603) 3385 2484
Davinder Kaur Gill
(603) 3385 2525
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Ratings on Projek Smart Holdings Sdn Bhd