MARC PLACES RATINGS ON SENAI-DESARU EXPRESSWAY BERHAD'S SENIOR AND JUNIOR SUKUK ON MARCWATCH NEGATIVE

Nov 16, 2012 -

MARC has placed its ratings on Senai-Desaru Expressway Berhad's (SDEB) RM1.89 billion nominal value Senior Sukuk Ijarah Medium Term Notes (Senior Sukuk) Programme and RM3.69 billion nominal value Junior Sukuk Ijarah Medium Term Notes (Junior Sukuk) Programme on MARCWatch Negative. SDEB is the concession holder for the Senai-Pasir Gudang-Desaru Expressway (E22).

The negative MARCWatch placement reflects E22's weak traffic performance since commencing full operations with the opening of Package 3 in July 2011. Traffic volumes have turned out to be as much as 40% below the traffic forecast and observed trends in traffic volumes suggest an increasing likelihood that E22's traffic performance and SDEB's cash flow generation will remain under pressure for longer than previously anticipated. Consequently, there is increasing uncertainty with respect to SDEB's ability to generate sufficient cash flow to service its debt and potential for a distressed restructuring of the rated sukuk prior to 2014. However, MARC has been informed by the issuer that it is in the midst of securing a funding commitment to refinance the sukuk and hopes to complete the refinancing by the end of the year. The negative MARCWatch placement also incorporates uncertainty over the resolution of legal risks posed by claims brought against SDEB for construction cost overruns by the expressway's contractor, Ranhill Engineers and Construction Sdn Bhd (REC), which is also a related entity of SDEB's main project sponsor. The financial impact of these claims could be potentially very high and pose a threat to SDEB's ability to continue as a going concern if the claims lead to a court judgement in the favour of REC.

MARC observes that the upturn in traffic volumes post-opening of the entire highway anticipated in E22's traffic forecast has remained elusive. The performance of the highway now strongly suggests that traffic volumes on the expressway had been significantly overestimated and casts doubts on E22's ability to recover project costs in a manner consistent with the base case financial projections. SDEB's liquidity sources and internal cash flow generation will likely address its Senior Sukuk profit payments until 2014 only, taking account its RM30.4 million cash balance as at end-June 2012 and cash flow from operations of RM13.8 million for the financial year ended June 30, 2012 (FY2012).

Since MARC's last rating action, REC has served a letter of demand on SDEB for the payment of RM366.9 million in respect of construction cost overruns arising from the delays in land acquisition and finalising of the design of the E22. MARC considers this development to be serious and unexpected. While SDEB had earlier provided for a part of these cost overruns in its FY2010 accounts, these were reversed in the subsequent financial year by SDEB. At present, MARC sees increased risk of winding-up proceedings being instituted against SDEB which could potentially prompt an acceleration of SDEB's senior obligations.

MARC expects to resolve the MARCWatch placement upon obtaining greater clarity and certainty on both issues: the progress made with respect to the company’s refinancing plans and actions that will be taken to resolve legal risks. The ratings of SDEB might be lowered by more than one notch in the event of a continued depletion of SDEB's liquidity in the intervening period prior to the financial close of the refinancing exercise and/or increased risk of an adverse development with regard to the planned refinancing exercise or legal action brought against SDEB by REC.

Contacts:
Jason Kok Ching Wui, +603-2082 2258 / jason@marc.com.my
David Lee, +603-2082 2255 / david@marc.com.my