RAM Ratings downgrades ratings of MRCB Southern Link’s Senior and Junior Sukuk

Published on 08 August 2012

RAM Ratings has downgraded the respective 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”), to A2 (from AA3) and BBB2 (from A2); both ratings remain on negative Rating Watch. The Company is a funding conduit for the 8.1-km Eastern Dispersal Link Expressway (“EDL” or “the Highway”) in Johor Bahru (“JB”). The Highway was opened to the public on 1 April 2012.

The rating downgrades are premised on uncertainties arising from the absence of a long-term solution to the Highway’s inability to commence tolling as per the terms of its concession agreement (“CA”). Since the announcement on non-tolling of the EDL in March 2012, a final resolution has yet to be reached to date.

The respective Senior and Junior Sukuk ratings of A2 and BBB2 are anchored on the assumption, as represented by the management, that the Government will implement a short-term measure to address MRCB Southern Link’s immediate cashflow position; without this, the ratings would face even greater downward pressure. We understand that the Government is evaluating several long-term solutions to permanently address the non-tolling of the EDL; however, details have yet to be firmed up at this juncture. Overall, we believe that achieving and executing a conclusive long-term solution will take time, given the many factors that the Government would need to consider.

Meanwhile, we highlight that MRCB Southern Link recently paid some RM40 million to the engineering, procurement and construction (“EPC”) contractor (a related company). This is contrary to the Company’s earlier representation that the amount would be withheld from the EPC contractor, so as to prioritise debt servicing. Under the circumstances, MRCB Southern Link’s ability to service its near-term debt obligations has been further affected.

The rating difference between the Senior and Junior Sukuk is due to the Junior Sukuk’s subordination in terms of cashflow priority and security. The current rating gap between the Senior and Junior Sukuk, now widened from 2 to 3 notches, reflects the latter’s role as a loss-absorption piece, as well as the increased likelihood that MRCB Southern Link may not be able to meet its debt obligations.

Finally, the negative Rating Watch reflects the probability that the ratings could come under significant downward pressure within the next 2 weeks, if the RM40 million outflow is not replenished, or if the Government’s short- and long-term measures are not implemented to address the Company’s immediate cashflow woes.

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