MARC DOWNGRADES RATING ON SPRINT'S RM510 MILLION BaIDS, AFFIRMS RM365 MILLION BG BONDS; OUTLOOK STABLE

Feb 10, 2012 -
MARC has lowered its rating on Sistem Penyuraian Trafik KL Barat Sdn Bhd's (SPRINT) RM510 million Al Bai Bithaman Ajil Islamic Debt Securities (BaIDS) to A+ID from AA-ID. The rating outlook is stable. Concurrently MARC has affirmed its AA-(bg) rating on SPRINT's RM365 million Bank Guaranteed Serial Fixed Rate Bonds (BG Bonds) with a stable outlook.

The rating and outlook of the BG Bonds reflect MARC's financial institution ratings on two of three banks participating in the consortium of bank guarantors for the BG Bonds, AmInvestment Bank Berhad and RHB Bank Berhad (public information basis), both of which are rated AA-/Stable. The rating on the BG Bonds reflects MARC's continued approach of rating the bonds at the same level as the lowest rated financial institution(s) participating in the consortium of bank guarantors.

The issuer, SPRINT, is the concession holder for the SPRINT highway, a 25.5 km open toll urban highway which serves the west of Kuala Lumpur. SPRINT is wholly-owned by SPRINT Holdings Sdn Bhd which, in turn, is owned by three listed entities, Gamuda Berhad (30%), Lingkaran Trans Kota Holdings Bhd (LITRAK) (50%) and Kumpulan Perangsang Selangor Bhd (20%).

The revision in the rating of the non-guaranteed BaIDS reflects the removal of rating uplift incorporated for shareholder support in the issue rating. The rating on the BaIDS had previously incorporated rating uplift from the stand-alone credit strength of SPRINT on the basis of undertakings by SPRINT Holdings and shareholders of SPRINT Holdings to subscribe to loan stocks and redeemable preference shares respectively, to be issued by SPRINT and SPRINT Holdings, the intent of which was to provide credit support for the BaIDS.

The tangible support provided by SPRINT's shareholders had enabled the toll road concessionaire to maintain fairly robust debt service coverage despite modest cash flow generation prior to the financial year ending March 31, 2010 (FY2010). In the absence of new explicit commitment from SPRINT's shareholders to provide further financial support following the fulfilment of the aforementioned investment obligations undertaken, MARC will not be incorporating the potential for further support into the rating on the BaIDS unless the rating agency is certain of forthcoming financial support.

The rating on the BaIDS incorporates revised traffic projections by independent traffic consultant Halcrow Consultants Sdn Bhd and weaker traffic growth prospects on the SPRINT highway, as well as the compensation payments received from the government in lieu of deferred toll rate hikes since 2008 for the highway's Damansara and Pantai links and 2010, in respect of Kiara Link. The rating also takes into account SPRINT's significantly improved operating cash flow generation in recent financial periods.

The SPRINT highway has seen improved traffic volumes in recent years since the opening of Duta-Ulu Kelang Expressway (DUKE) in 2009. Traffic volume on the Kerinchi Link and Penchala Link grew 9.9% and 21.3% respectively for the 2010 calendar year. Consequently, SPRINT's revenue rose by 29.0% to RM156.5 million for FY2011. However, higher amortisation of SPRINT's highway development expenditure resulted in a larger pre-tax loss of RM49.2 million in FY2011. On a positive note, SPRINT generated cash flow from operations of RM110.5 million in FY2011, up from RM107.8 million for the prior year, and has a cash balance of RM115.0 million as at end-FY2011.

According to the aforementioned May 2011 traffic study which incorporates downward revision of projected traffic along the three links of between 12% to 32% from 2012 through 2035, possible congestion along the Kerinchi Link could limit traffic growth on the highway. The financial impact of the revised forecast will be a reduction of SPRINT's minimum and average projected debt service coverage ratio (DSCR) to 2.13 times and 3.21 times respectively, from 2.24 times and 3.62 times respectively based on the previous traffic forecast. Additionally, should toll hikes not occur as scheduled and if SPRINT were to receive cash compensation payments, half of which is paid in the following financial year, its minimum and average projected DSCR would fall to 1.93 times and 2.87 times respectively. The rating agency notes that SPRINT’s cash flow is more sensitive to delays in the receipt of compensation payments from the government than negative yearly variances of up to 15% from projected traffic volume for the highway’s Kerinchi and Penchala links.

The prompt payment of compensation from the government is fundamental to SPRINT’s maintenance of its liquidity and cash flow metrics at levels commensurate with its current rating, particularly in view of its forthcoming debt obligations of RM131.2 million and RM143.6 million in FY2012 and FY2013 respectively.

The stable outlook assumes that the SPRINT highway will achieve traffic levels in line with the revised traffic forecast and that SPRINT's cash flow generation and liquidity will not detract significantly from anticipated levels.

Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
David Lee, +603-2082 2255 / david@marc.com.my;
Jason Kok, +603-2082 2258 / jason@marc.com.my.