MARC DOWNGRADES SENAI-DESARU EXPRESSWAY BERHAD’S RATINGS; REMOVES RATINGS FROM MARCWATCH NEGATIVE

Feb 15, 2013 -

MARC has downgraded 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 to BBB+IS and BBIS from A+IS and A-IS respectively. Concurrently, MARC has removed the ratings from MARCWatch Negative where it had been placed on November 16, 2012. The outlook on the ratings is negative.

The rating action reflects slower-than-expected progress in SDEB's proposed debt restructuring to address the severe traffic underperformance experienced by the company’s sole toll concession asset, the Senai-Pasir Gudang-Desaru Expressway (E22). Actual traffic, growth rates and revenue have remained substantially below projections; average daily traffic for the 2012 calendar year was only 587,163 passenger car unit-kilometre (pcu-km) compared to 2010’s projections of 925,373 pcu-km. At the same time, the assumed traffic ramp up in the initial start-up years and traffic spillover from the congested Pasir Gudang Highway have not materialised, fuelling concerns over the toll road’s economic viability and the time frame needed for actual traffic to catch up with the forecasted traffic. MARC also does not expect any major near-term catalysts in view of the long gestation period for upcoming developments in the surrounding areas.

The latest 2012 traffic projections from traffic consultant Perunding Trafik Klasik Sdn Bhd have reduced the stimulated growth expected from upcoming projects, including the RAPID Project, Senai Cargo Hub and Tanjung Langsat Industrial Complex. MARC notes that the new traffic projections continue to rely on spill-over traffic from the congested Pasir Gudang Highway where current traffic volume has exceeded the road’s capacity with an estimated volume of 100,000 vehicles/day. The E22's flat traffic amid congested existing routes underlines MARC's belief that the public's acceptance of toll roads remains the primary determinant of the highway's viability as an alternative route and congestion reliever.

Since MARC’s previous rating action, there have been no further material developments relating to the legal action taken by the toll road’s contractor, Ranhill Engineers and Construction Sdn Bhd (REC) to recover construction cost overruns on the highway. SDEB has refuted REC’s claims through its lawyers, however, MARC cautions that any payout of claims may further exacerbate the company’s already weakened financial position and complicate restructuring efforts.

Based on SDEB’s cash balances of RM25.5 million as at December 31, 2012 and cash flow from operations (CFO) of RM12.2 million during the six-month period ending December 31, 2012 (6MFY2013), MARC expects SDEB’s cash flow to be insufficient  to service the rated sukuk beyond 2013. In 6MFY2013, SDEB incurred sizeable pre-tax losses of RM98.7 million on account of its hefty accrued finance costs. While SDEB does not have to make annual cash outlays for finance costs on its zero coupon Junior Sukuk and loan stocks, MARC notes that SDEB's six-month finance service obligation amounts to RM17.0 million which continues to be significantly larger than its operational cash flows.

The negative outlook reflects the likelihood of further negative rating action over the next 12 months in the event SDEB fails to make sufficient progress on its debt restructuring efforts and/or SDEB experiences further credit deterioration which warrants a lowering of the ratings.

Contacts:

Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.