RAM Ratings puts negative Rating Watch on MRCB Southern Link's Senior and Junior Sukuk

Published on 22 November 2011
RAM Ratings has reviewed and placed the respective AA3 and A2 ratings of MRCB Southern Link Berhad’s (“MRCB Southern Link” or “the Company”) RM845 million Secured Senior Sukuk (2008/2025) (“Senior Sukuk”) and RM199 million Junior Sukuk (2008/2027) (“Junior Sukuk”) on Rating Watch, with a negative outlook. The Company is a wholly owned subsidiary of MRCB Lingkaran Selatan Sdn Bhd – the concessionaire for the 8.1-km Eastern Dispersal Link Expressway (“EDL”) in Johor Bahru (“JB”), which is currently more than 90%-completed. The EDL imposes toll charges on vehicles that cross the Johor-Singapore Causeway (“the Causeway”) in both directions.

The negative Rating Watch reflects the potentially lower-than-expected traffic volume for the Causeway when the EDL commences tolling operations. Based on a recent desktop traffic review by a new traffic consultant, the opening average daily traffic (“ADT”) is projected to come up to around 55,000 vehicles when the EDL begins collecting toll in 2012. This takes into account the Causeway’s latest traffic performance and possible knee-jerk reaction to the steep spike in toll rates. Given this latest development, RAM Ratings is concerned that the initially anticipated opening ADT of 62,000 vehicles - premised on the traffic study conducted in 2007 - may be a challenging task.

Assuming an ADT of at least 55,000 vehicles in 2012 (with toll collections starting in July 2012), MRCB Southern Link is expected to have a tight liquidity position in the near to medium term. Based on these assumptions, the Senior Sukuk’s debt coverage would be weaker than originally expected, albeit still adequate. On the other hand, the Company’s ability to meet the obligations on the Junior Sukuk poses a concern.

On this note, the management aims to kick off tolling operations on 1 February 2012 (estimated to provide an additional RM50 million of cashflow for debt service), besides retaining an unutilised RM37 million from the financing programme to preserve the Company’s debt coverage at the initially expected levels. If any of these do not materialise, the ratings of the Senior and Junior Sukuk will be subject to downward pressure. RAM Ratings will maintain close monitoring on the relevant developments. We note that further rating action will likely take place in the next 6 months.

Elsewhere, MRCB Southern Link’s financial commitments on the Senior and Junior Sukuk will be supported by back-to-back payments from the concessionaire once tolling operations commence; the security package ensures the Senior and Junior Sukuk holders’ full and direct recourse to the concessionaire. In this regard, we acknowledge the strong credit link between MRCB Southern Link and the concessionaire; as such, both entities are viewed in aggregate from a credit standpoint.

RAM Ratings' Rating Watch highlights a possible change in an issuer's sukuk rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated sukuk under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Issues will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Media contact
Michael Ti
(603) 7628 1015
michael@ram.com.my