MARC has affirmed its rating of BBB-IS on Senai-Desaru Expressway’s (SDEB's) RM1.89 billion Islamic Medium-Term Notes (Restructured Sukuk) Programme with a stable outlook.
The rating incorporates the improving traffic volume on the expressway and the accommodative payment structure under the programme, which provides SDEB with headroom to improve its cash flow coverage. Under the restructured sukuk, initiated in 2014, the step-up profit rate structure eases liquidity pressure in the early years of the programme’s tenure, allowing for cash buildup to meet its back-ended principal obligations. In addition, extension of the concession to 2053 from the initial 2038 allows for upside benefit from traffic volume growth generated from planned developments in the expressway’s service areas. The rating also takes into account SDEB’s continued weak credit profile, characterised by persistent negative shareholders’ funds.
MARC notes that total annual traffic volume on the Senai-Pasir Gudang-Desaru Expressway (SDE), which comprises a 77km tolled inter-urban expressway between Senai and Desaru with a connecting highway to Pasir Gudang, increased 17.6% year-on-year (YoY) to 292.4 million passenger car unit-kilometres (pcu-km). The growth was 10.6% higher than the projected traffic volume. The improvement, despite a toll hike in October 2015, has been attributed to increased development activities along the expressway, widening works on the toll-free alternative, and the ongoing projects in Pengerang, where the multi-billion ringgit RAPID project is in progress. Given the actual traffic CAGR of 6.9% over the last three years, traffic volume growth would need to at least sustain to meet traffic projections: the SDE is projected to achieve CAGR of 8.3% from 2016 to 2022, normalising to 7.4% until 2038 before declining to 5%.
The sensitivity analysis on SDEB’s cash flow projections demonstrates that the company can withstand a drop of 7.4% in traffic volume from the base case projections throughout the sukuk tenure and a higher-than-expected operating cost of 4.8% per annum. MARC notes that in the absence of toll hikes and no government compensations given, SDEB’s debt servicing ability would come under pressure starting in FY17. The sensitivity results also show that delays in the RAPID project would weigh on SDEB’s traffic volume and, consequently its cash flows to meet principal repayment of the sukuk, which commences by FY2039.
The back-ended amortisation structure provides SDEB headroom to strengthen its liquidity position in order to maintain compliance with the covenanted finance service cover ratio (FSCR) of 1.25 times, a requirement that commences from June 30, 2018 and runs throughout the remaining tenure of the restructured sukuk.
As at 8MFY2016, the company’s cash and cash balances stood at a low RM26.6 million relative to its financial obligations. MARC remains concerned on SDEB’s sizeable obligations under the concession agreement to widen and upgrade the Cahaya Baru-Pasir Gudang and Ulu Tiram-Cahaya Baru stretches in 2016 and 2017 respectively. However, due to the low usage of the aforementioned stretches, SDEB is seeking a deferment from the government as it will need to incur costs of about RM373.6 million to carry out the upgrading works. The sukuk holders have given SDEB an extension until June 30, 2016 to obtain approval, failing which a technical breach would occur.
The stable outlook reflects SDEB achieving sustainable traffic performance and timely receipt of government compensations as demonstrated in the recent years. Any revision to the rating and/or outlook would depend on the outcome of deferment on the upgrading works or any material deviations from the assumptions set out in the projections.
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