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Published by :
RAM Rating Services Berhad (763588-T)
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May 2011
A credit perspective on variations to
parameters of toll-road concessions
Published by :
RAM Rating Services Berhad (763588-T)
Suite 20.01, Level 20 The Gardens South Tower
Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur
T +603 7628 1000 +603 2299 1000
F +603 7620 8251 E ramratings@ram.com.my W www.ram.com.my
OVERVIEW
The assessment of regulatory risk has always been essential in the ratings of toll-
road concessionaires. This commentary examines the credit impact following
recent announcements on toll-rate cuts, freezes on scheduled tariff increases, and
the abolishment of toll collections for some concessionaires in RAM Ratings’
portfolio.
A tolled road is formally conceptualised following the award and subsequent
signing of the concession agreement (“CA”) between the Government and the
concessionaire. The CA spells out details of the concession, including tariff
schedules, compensation and termination terms. Given the vast outlay required
and long gestation periods, the construction of tolled roads in Malaysia has been
largely financed by the issuance of private debt securities (“PDS”).
As project-financed entities, toll concessionaires have stringent restrictions that
prohibit them from undertaking other business activities, apart from designing,
constructing, operating and maintaining their respective tolled roads. In this
regard, toll-road projects are generally ring-fenced and financed on a non-recourse
basis.
Since 1992, RAM Ratings has rated 59 debt issues from 17 toll-road
concessionaires, with a combined value in excess of RM70 billion. Of these, more
than RM27 billion of debt facilities under 12 toll concessionaires remain
outstanding to date. RAM Ratings’ portfolio includes companies or concessionaires
with matured tolled roads, such as Projek Lebuhraya Utara-Selatan Berhad
(“PLUS”), New Pantai Expressway Sdn Bhd, Penang Bridge Sdn Bhd (“PBSB”),
Expressway Lingkaran Tengah Sdn Bhd (“ELITE”), Kesas Sdn Bhd (“KESAS”) and
MAY 2011
A CREDIT PERSPECTIVE ON VARIATIONS TO PARAMETERS
OF TOLL-ROAD CONCESSIONS
Analytical Contacts:
Yean Ni Ven Manager Infrastructure & Utilities Ratings (603) 7628 1172 niven@ram.com.my Chong Van Nee Head Infrastructure & Utilities Ratings (603) 7628 1028 vannee@ram.com.my
Lingkaran Trans Kota Sdn Bhd (“Litrak”); newer ones such as Projek Lintasan Shah
Alam Sdn Bhd (“PLSA”); those with tolled roads that are still under construction,
such as MRCB Southern Link Berhad (“MRCB Southern Link”); and holding
companies as well as financing conduits such as Cerah Sama Sdn Bhd, PLUS SPV
Berhad and Seafield Capital Berhad.
REGULATORY ENVIRONMENT TO DATE
Toll-rate increases have been a recurrent predicament for all stakeholders involved
due to their social and political implications. It is therefore not surprising that there
have been instances when rate hikes have not received the green light from the
authorities. Nonetheless, the Government has always compensated the
concessionaires in such instances, as provided for under their CAs. The
compensation has mostly been paid in cash, although there have been a few cases
where it has taken the form of extensions to the concession periods and/or tax
reprieves. For the toll concessionaires in RAM Ratings’ portfolio, the compensation
packages - such as cash and/or tax reprieves - offered by the Government have
been in line with the spirit of the relevant CAs.
Table 1: Compensation packages of selected toll concessionaires
Concessionaire Remarks Types of compensation
Projek Lebuhraya
Utara-Selatan
Berhad (“PLUS”)
Overall reduction in toll rates vis-
à-vis the tariff schedule.
Extension of concession for a further 12 years to 31 May
2030 via a Supplemental Concession Agreement (“SCA”),
inked on 8 July 1999.
Overall reduction in toll-rate
increases – a 10% rise in tariffs
every 3 years instead of the
original 26%-33% hikes every 3-5
years.
Pursuant to the Second Supplemental Concession
Agreement dated 11 May 2002:
Deduction of the notional tax on dividends that PLUS
would declare and pay (if any) from the tax-exempt
profits accumulated during the 5-year tax-exempt period
(from 2002 to 2006).
Deduction of all interest payable on the Government
Support Loan (“GSL”).
Offsetting of PLUS’s income-tax liabilities payable to the
Inland Revenue Board against such compensation due to
the company.
Waiver of any shared toll revenue payable to the
Government against such compensation due to PLUS.
Abolishment of toll collection at
the Senai toll plaza, effective 1
March 2004.
Inclusion of the Seremban-Port
Pursuant to the Third Supplemental Concession Agreement
signed on 22 April 2005:
Extension of the concession term by 8 years and 7
months, i.e. ending on 31 December 2038.
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Dickson Highway (“SPDH”) as
part of the PLUS Expressways
effective 7 October 2004.
Additional Works involving road
widening and the relocation of
toll plazas.
Prepayment of PLUS’s RM750
million GSL and RM212 million
Additional Government Support
Loan (“AGSL”).
Consequential amendments to
the toll-compensation
arrangement pursuant to the
prepayment of the GSL and
AGSL.
No increase in toll rates after
2030.
Deferment of 10% tariff increase
that was supposed to have been
effective on 1 January 2008
(except for the SPDH, the 2 ends
of the North South Expressway at
the Johor Causeway and the Bukit
Kayu Hitam toll plaza).
Cash compensation.
Lingkaran Trans
Kota Sdn Bhd
Overall reduction in tariff hikes
(i.e. passenger cars were charged
RM1.00 compared with the original
RM1.50), which took effect in
March 1999.
Cash compensation pursuant to the Supplemental
Agreement signed on 20 August 1999.
Overall reduction in toll rate hikes
(i.e. passenger cars were charged
RM1.60 compared with the
scheduled RM2.10).
Cash compensation pursuant to the Second Supplemental
Concession Agreement signed on 4 September 2007.
New Pantai
Expressway Sdn
Bhd
Abolishment of the PJS 2 Kuala
Lumpur-bound plaza.
Cash compensation.
Toll-rate reduction at the PJS 2 toll
plaza.
Cash compensation
REGULATORY ENVIRONMENT GOING FORWARD
The idea of a sector-wide toll-rate restructuring has been in the offing for some
time now. This idea appears to be finally crystallising, based on the recent
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announcements of freezes on toll-rate hikes, tariff cuts and abolishment of toll
collections with no compensation.
On 15 October 2010, it was announced that toll rates would be frozen for 5 years,
effective 1 January 2011, for 4 highways under PLUS Expressways Berhad (“PEB”).
This was followed, in relatively quick succession, by a similar statement on the
highways under MTD Capital Berhad (“MTD Cap”), i.e. the Kuala Lumpur-Karak
Expressway (“KLKE”) and Phase 1 of the East Coast Expressway
(“ECE1”).Meanwhile, tolling will be abolished for the East-West Link Expressway
(“EWLE”) from May 2011. Both announcements had been made together with
privatisation proposals. On 17 February 2011, the Government announced a tariff
reduction for New Pantai Expressway Sdn Bhd’s (“NPESB”) Petaling Jaya Selatan 2
(“PJS2”) toll plaza, from RM1.60 to RM1.00 (for Class 1 vehicles, effective 18
February 2011).
While it had been mentioned that the concessionaires for the KLKE, ECE1 and
EWLE will not be receiving any form of concession extension or compensation in
exchange, compensation details - if any - remain scant for the highways under PEB.
For the PEB, privatisation would need to take into consideration the
synchronisation of the terms of the various existing CAs under its stable. In the
meantime, it has been announced that NPESB will receive an estimated RM90
million in cash compensation for the reduction of its toll rate.
Apart from the above, we have also not discounted the possibility that other toll
concessionaires have been approached with similar forms of restructuring, i.e.
temporary freezes on tariff hikes or a lower quantum of increase, with no
compensation. The recent announcements highlight variations to concession
parameters that may affect the cashflow and debt-repayment ability of some toll
concessionaires.
ABILITY TO WITHSTAND IMPACT - KEY TO PRESERVING CREDIT PROFILE
We understand that the streamlining of the terms of the PEB Group’s CAs will be
followed by the restructuring of all its bonds and sukuk issues in order to match
the Group’s revised cash-generating aptitude to its debt-repayment profile.
As for NPESB, the compensation of an estimated RM90 million is expected to
restore the debt-coverage levels of both its Senior and Junior Notes. This is based
on the assumption that the cash compensation will be retained by the company, as
any distribution to its shareholders would erode the available cash pile for debt
service.
All said, any downward revision for toll rates without a corresponding cash
compensation is a credit negative. Nevertheless, this does not necessarily mean
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that there will be a rating change as each concessionaire’s credit profile is different,
especially with regard to its cashflow and debt obligations. For example, a
concessionaire may have sufficient cashflow and/or cash reserves in its financial
structure to withstand such an impact, thus maintaining its debt-servicing ability.
However, the reverse is also true; the more removed or subordinated a debt is
from the source of cashflow, the more severe would be the likely impact. A
commonly used quantitative measure of the strength of a project’s debt-servicing
ability is the debt service coverage ratio (“DSCR”) with cash balances, post-
distribution.
Analysis of RAM Ratings’ portfolio indicates that the majority of the rated toll
concessionaires should be able to withstand some level of impact on their
cashflow-generating aptitude without jeopardising their credit standing (refer to
Table 2 for projected debt/finance coverage ratios before toll-rate revisions).
Based on the announcements so far, there is no standard template for the toll-rate
restructuring which, thus far, has been undertaken on a case-by-case basis
through negotiations; these have account of the severity of the potential impact on
each concessionaire and its stakeholders. We believe that any tariff restructuring
involving toll concessionaires other than those mentioned thus far will take a
similar route. Given that there is no one-size-fits-all approach, it is difficult to
ascertain how it will eventually pan out at this juncture. As highlighted earlier, the
degree of impact on each concessionaire will differ. In view of this, RAM Ratings
will have to evaluate the specific toll concessionaire as events unfold and update
the market accordingly.
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Table 2: Projected debt/finance coverage ratios (debt/sukuk issued by toll concessionaires and toll-road-related entities)
Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Kesas Sdn Bhd
RM800
million Al-Bai’
Bithaman Ajil
Islamic Debt
Securities
(2002/2014)
AA3 /Stable
2.13 times
(excluding financial
year ended 31
March 2014)
2.16 timesx
No payments on
Redeemable Convertible
Unsecured Loan Stocks,
dividends or distributions to
shareholders if:
The financial service
coverage ratio (“FSCR”)
is less than 2.0 times, or
would be less than 2.0
times following such
payments or
distributions.
Shah Alam Expressway boasts
commendable traffic-volume
growth.
Strong debt-coverage measures.
Competition from other routes.
Exposed to regulatory and
single-project risks.
Konsortium
Lebuhraya
Butterworth-Kulim
Sdn Bhd
RM247
million
Secured Bai’
Bithaman Ajil
Islamic Debt
Securities
(2005/2022)
AA3/Stable 2.50 times 3.51 times
No distributions to
shareholders unless:
The FSCR is able to
meet the covenanted 2.5
times after such
payments.
The issuer is able to
maintain a debt-to-
equity (“DE”) ratio of not
more than 70:30.
Sustained traffic volume of the
Butterworth-Kulim Expressway.
Strong debt-servicing ability,
supported by stringent
covenants.
Exposed to regulatory and
single-project risks.
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Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Lebuhraya
Kajang-Seremban
Sdn Bhd
(“LEKAS”)
RM785
million Senior
Sukuk
Istisna’
(2007/2022)
RM633
million Junior
Sukuk
Istisna’
(2007/2025)
RM240
million
Redeemable
Convertible
Unsecured
Loan Stocks
Programme
(2007/2026)
RM50 million
Redeemable
Unsecured
Loan Stocks
(2007/2027)
Senior Sukuk
Istisna’: BBB1
Junior Sukuk
Istisna’: BBB3
RULS: B3
RCULS: B3
/Negative (all
ratings)
Not meaningful Not meaningful
No distributions to
shareholders unless:
The FSCR is able to
meet the covenanted 2.0
times following such
payments.
After the first principal
payment on the Senior
Sukuk Istisna’.
Adequate debt-servicing ability
during the ramp-up period until
December 2013.
Weaker-than-expected traffic
performance and toll collections.
Competition from other routes.
Exposed to regulatory and
single-project risks.
The negative outlook reflects
our concerns about LEKAS’s
ability to meet its future debt
obligations due to its poorer-
than-expected cash-generating
aptitude. The ratings will come
under further downward
pressure if the highway’s traffic
volumes and toll collections
remain subdued and/or efforts
to restructure the debt
securities do not progress in a
timely manner.
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Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Lingkaran Trans
Kota Sdn Bhd
RM1.15
billion Sukuk
Musyarakah
Islamic
Medium-
Term Notes I
Programme
(2008/2023)
RM300
million Sukuk
Musyarakah
Islamic
Medium-
Term Notes
II
Programme
(2008/2023)
RM100
million
Islamic
Commercial
Papers
Programme
(2008/2015)
Sukuk
Musharakah
IMTN I: AA2 /
Stable
Sukuk
Musharakah
IMTN II: AA2/
Stable
ICP: P1
2.12 times 3.04 timesx
No distributions to
shareholders, or provide or
repay any advances or loans
to its shareholders,
subsidiaries or association
companies if:
The Distribution FSCR is
less than 2.00 times.
The DE ratio is greater
than 90:10.
Strong business profile
underscored by the expressway’s
strategic alignment and
surrounding matured townships.
Strong debt-servicing ability.
Exposed to regulatory and
single-project risks.
8
Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
MRCB Southern
Link Berhad
(funding vehicle
for toll
concessionaire
MRCB Lingkaran
Selatan Sdn Bhd)
RM845
million
Secured
Senior Sukuk
(2008/2025)
RM199
million Junior
Sukuk
(2008/2027)
Senior Sukuk:
AA3/Stable
Junior Sukuk:
A2/Stable
1.33 times
1.06 time (sub-
FSCR)
1.93 times
1.97 times (sub-
FSCR)
No payments to Junior
Sukuk holders if:
The Senior FSCR (semi-
annual) falls below 2
times following such
payments.
The DE ratio of 80:20 is
breached or if the ratio
will be breached
following such
payments.
No distributions to
shareholders if:
The Senior FSCR falls
below 2 times (semi-
annual) or the Junior
FSCR drops below 2.5
times following such
payments.
The DE ratio of 80:20 is
breached or if the ratio
will be breached
following such
payments.
There are unpaid
accumulated profit
payments on the Junior
Sukuk.
Favourable tolling concept –
encompasses all existing traffic
entering and exiting Malaysia via
the Johor-Singapore Causeway,
which has been recording
healthy volumes.
Cashflow offers strong coverage
on senior debts, adequate for
junior obligations.
Pre-completion risk of potential
delays and cost overruns.
Exposed to regulatory and
single-project risks.
9
Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
New Pantai
Expressway Sdn
Bhd
RM490
million Senior
Bai’
Bithaman Ajil
Notes
(2003/2014)
RM250
million Junior
Bai’
Bithaman Ajil
Notes
(2003/2016)
Senior Bai’
Bithaman:
AA3/Stable
Junior Bai’
Bithaman:
AA3(s)/Stable
2.21 times 2.79 times
No distributions if:
The Senior FSCR (with
cash balances, post-
distribution) is less than
2 times.
Stable traffic-volume growth
supported by established
townships.
Strong debt-servicing ability
after the completion of a debt-
restructuring exercise for the
Senior Notes.
Exposed to regulatory and
single-project risks.
The enhanced rating of the
Junior Notes reflects the
strength of the corporate
guarantee from IJM
Corporation Berhad, pursuant
to the Payment Guarantee that
unconditionally and irrevocably
guarantees the Junior Notes
throughout the existence of the
Senior Notes.
10
Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Penang Bridge
Sdn Bhd
RM785
million Al-
Bai’
Bithaman Ajil
Facility
(2000/2013)
RM695
million
Redeemable
Zero-Coupon
Serial Sukuk
Istisna’
(2006/2019)
AA2/Stable 1.77 times 2.90 times
No distributions if:
The FSCR is less than
2.5 times after such
distributions.
Resilient traffic flows supported
by strategic position as the sole
road link to Penang island.
Strong debt-servicing ability.
Potential traffic leakage from
Second Crossing.
Exposed to regulatory and
single-project risks.
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Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Projek Lebuhraya
Utara-Selatan
Berhad
RM3.55
billion Senior
Sukuk
(2007/2017)
RM2.26
billion Sukuk
Musharakah
Series 1
(2006/2016)
RM2.41
billion Sukuk
Musharakah
Series 2
(2006/2019)
RM4.5 billion
Sukuk
Musharakah
Medium-
Term Notes
Programme
(2006/2031)
AAA/Stable 2.47 times 3.01 times
No distributions if:
The FSCR (with cash
balances) is less than
2.25 times immediately
after such payments.
Robust traffic flows along the
North-South Expressway, the
backbone of connectivity for
Peninsular Malaysia.
Strong cashflow.
Low likelihood of competing
routes.
Exposed to regulatory and
single-project risks.
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Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Projek Lintasan
Shah Alam Sdn
Bhd
RM330
million Sukuk
Ijarah
(2008/2027)
RM415
million Sukuk
Mudharabah
(2008/2037)
Sukuk Ijarah:
A1/Stable
Sukuk
Mudharabah:
A3/Stable
2.15 times
1.55 times (sub-
FSCR)
5.05 times
1.55 times (sub-
FSCR)
No payments to the Junior
Sukuk holders (applicable
post-2025) and shareholders
if:
The FSCR falls below 1.7
times following such
payments.
The DE ratio of 55:45 is
breached following such
payments.
No distributions to
shareholders if:
The Senior Sukuk is still
outstanding.
The Junior Sukuk’s FSCR
is less than 2 times
following such
payments.
The DE ratio is more
than 55:45 following
such payments.
There are unpaid
cumulative profit
payments on the Junior
Sukuk.
Ready catchment area to drive
near-term traffic growth on
Lebuhraya Kemuning-Shah
Alam; Alam Impian township
expected to yield longer-term
traffic potential.
Stable debt-servicing ability;
stringent covenants and
favourable repayment profile.
Exposed to regulatory and
single-project risks.
13
Issuer
Issue
amount and
type
Issue
rating(s)/
outlook
Minimum debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Average debt /
finance service
coverage ratio
(with cash
balances, post-
distribution)
Salient distribution
covenant(s)
Remarks
Seafield Capital
Berhad (funding
vehicle for
Expressway
Lingkaran Tengah
Sdn Bhd)
RM1.5 billion
Sukuk
Musharakah
Programme
(2009/2029)
AA2/Stable 2.00 times 6.41 times
No distributions to its
shareholders if:
Its FSCR is less than 2
times following such
distributions.
Steady traffic growth
underscored by strategic
alignment - primary link between
the New Klang Valley
Expressway, Kuala Lumpur
International Airport and the
North-South Expressway.
Sukuk obligations amply covered
by project cashflow.
Susceptible to financial risks in
terms of future debt.
Exposed to regulatory and
single-project risks.
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StandPoint Commentary
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties
participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM
Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectiv ity, integrity and independence of
its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings,
it receives no payment for doing so, except for subscriptions to its publications.
No statement in this paper is to be construed as a recommendation
to buy, sell or hold securities, or as investment advice, as it does not
comment on the security's market price or suitability for any
particular investor.
Published by RAM Rating Services Berhad
Reproduction or transmission in any form is prohibited except by
permission from RAM Ratings.
Copyright 2011 by RAM Ratings
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