RAM.pdf

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RAM Rating Services Berhad (763588-T)

Suite 20.01, Level 20 The Gardens South Tower

Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur

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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 [email protected] 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 [email protected] Chong Van Nee Head Infrastructure & Utilities Ratings (603) 7628 1028 [email protected]

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.



6

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)


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


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.



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)


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.



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)


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


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


payments.


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.



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)


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.



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)


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)



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.



11

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)


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


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.



12

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)


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


payments.


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.



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)


covenant(s)

Remarks

Seafield Capital

Berhad (funding

vehicle for

Expressway

Lingkaran Tengah

Sdn Bhd)

RM1.5 billion

Sukuk

Musharakah

Programme

(2009/2029)


No distributions to its

shareholders if:

Its FSCR is less than 2


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.



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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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