RAM Ratings reaffirms Kesas’ debt rating; outlook revised to negative

Published on 29 October 2012

RAM Ratings has reaffirmed the AA3 rating of Kesas Sdn Bhd’s (“Kesas” or “the Company”) RM800 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (2002/2014) (“BaIDS”). However, the outlook on the long-term rating has been revised from stable to negative. Kesas is the toll concessionaire for the 35-km Shah Alam Expressway (“the SAE” or “the Expressway”) under a concession agreement (“CA”) that is valid until 18 August 2023.

The negative outlook signals that the rating of the BaIDS may come under downward pressure if Kesas continues making distributions to its shareholders, thereby eroding the Company’s future cash buffers. This follows a RM48.5 million dividend payment to Kesas’ shareholders in FYE 31 March 2012 (“FY Mar 2012”) and a lumpy RM278 million that will come due under the BaIDS in fiscal 2014, relative to the Company’s projected pre-financing cashflow of RM197 million for the same year. It is crucial that Kesas retains cash, particularly by curtailing distributions to its shareholders, to cushion against any liquidity pressure.

RAM Ratings’ assessment assumes no further distributions to Kesas’ shareholders via dividends or interest expenses on its redeemable convertible unsecured loan stock for the remainder of the BaIDS’s tenure; this translates into projected finance service coverage ratios (“FSCRs”) (with cash balances, calculated on debt-repayment dates) of 1.22 times on 10 October 2013 and 2.06 times on 10 October 2014. Any deviation from our expectations will warrant a reassessment, and is likely to exert downward pressure on the rating.

On a more positive note, the Expressway has been showing commendable traffic-volume growth in recent years, despite the competition it faces from other routes such as Federal Highway Route 2 and the New Pantai Expressway. In FY Mar 2012, the Expressway’s average daily traffic climbed 7.9% year-on-year to 275,418 vehicles, supported by organic traffic-volume growth from the developments along the corridor (FY Mar 2011: +8.9%, 255,193 vehicles).

As with all toll concessionaires, however, the rating remains moderated by regulatory risk that is inherent for all toll-road projects, as well as single-project risk. To this end, RAM Ratings understands that there will be no toll-rate increase for Kesas from 2011 to 2015. However, compensation remains uncertain at this juncture. While we note that the Company is entitled to claim compensation from the Government for non-revision of tariffs, such redress may take non-monetary form. While our sensitised cashflow analysis shows that Kesas will have adequate cash to repay its outstanding financial obligations without any compensation from the Government, we highlight that distributions to its shareholders will have to be held back under such a scenario.

Media contact

Davinder Kaur Gill

(03) 7628 1118

davinder@ram.com.my