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

Published on 23 August 2012 

RAM Ratings has downgraded the respective long-term 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 BB3 (from A2) and C1 (from BBB2); 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; however, the Government announced in March 2012 that EDL will not be commencing tolling as per the terms of the concession agreement.

The rating downgrades are premised on the Company’s significant liquidity stress. After the unexpected RM40 million payment to the engineering, procurement and construction (“EPC”) contractor (a related company), MRCB Southern Link has a high likelihood of defaulting on both the Senior and Junior Sukuk on 21 December 2012. We understand that Malaysian Resources Corporation Berhad, i.e. the ultimate project sponsor, does not intend to fund any shortfall in meeting the debt obligations. In the meantime, the implementation of the Government’s short- and long-term plans to resolve the non-tolling of EDL remains uncertain. Although the Government’s past actions have been equitable to concessionaires in general, we are concerned that the short-term plan to address MRCB Southern Link’s immediate cashflow position may not be executed in time, given the tight window of just 4 months before the projected default. On the other hand, details on long-term solutions have yet to be firmed up. We view that the finalising and implementing a long-term solution will be a long-drawn-out affair, given the many factors that would need to be considered by the Government.

As at end-July 2012, the consolidated cash holdings of MRCB Southern Link and the concessionaire summed up to around RM21 million, against some RM47 million of debt obligations for the remainder of this year. Had the management not made the RM40 million payment to the EPC contractor, the Company would have instead been expected to default on the Senior and Junior Sukuk in December 2013.

The rating difference between the Senior and Junior Sukuk is due to the latter’s subordination in terms of cashflow priority and security. The widening of the rating gap between the Senior and Junior Sukuk, from 3 to 4 notches, reflects the Junior Sukuk’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 indicates that the ratings could come under further downward pressure in the very near-term, if neither the short- nor long-term solution can be implemented promptly.

To address the Company’s precarious liquidity situation, the management is working on amending the terms of the Senior and Junior finance service reserve account bank guarantees (“FSRA BGs”), to allow the project and account monitoring agent to draw down from the facilities before the anticipated default on 21 December 2012. In any case, even if the Senior and Junior FSRA BGs were amended, the Company’s projected default on the Senior and Junior Sukuk would only be deferred to June 2013. It also remains uncertain if the Senior and Junior FSRA BGs can be amended in time, as this is subject to approval from the facilities’ provider, who is also the Company’s bondholder and lender to the RM220 million syndicated term loan.

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