RAM Ratings upgrades MRCB Southern Link’s sukuk ratings, with developing Rating Watch

 

Published on 19 June 2013

RAM Ratings has upgraded the respective long-term ratings of MRCB Southern Link Berhad’s (“MRCB Southern Link” or “the Company”) Senior and Junior Sukuk to BBB3 and BB1 (both from C3). Concurrently, the ratings have been put on Rating Watch, with a developing outlook. The rating differential between the Senior and Junior Sukuk reflects the Junior Sukuk’s subordinated status from a legal perspective. MRCB Southern Link is a funding conduit for the 8.1-km Eastern Dispersal Link Expressway (“EDL” or “the Highway”) in Johor Bahru. Despite having been opened to the public since 1 April 2012, toll collection has yet to commence for the EDL.

The rating upgrade is premised on the timely receipt of monthly interim payments of RM11 million each from the Government to date, subsequent to the execution of an Interim Agreement on 27 November 2012. Boosted by RM143 million of interim payments up to May 2013, MRCB Southern Link’s liquidity position has improved significantly, with RM108 million of cash balances as at mid-May 2013. The Company had previously been anticipated to face a cash shortfall vis-à-vis meeting its profit obligations in December 2012. Via the Interim Agreement, the Government has agreed to make monthly payments of RM11 million each to the Company until a full and final settlement is reached in relation to the acquisition of the EDL. The monthly cashflow is, nonetheless, not expected to sufficiently support MRCB Southern Link’s debt obligations; the Company is expected to face a shortfall in June 2018.

On that note, the ratings also consider the Government’s commitment to acquire the EDL as part of its long-term measure to permanently address the non-tolling of the Highway. The ratings have been put on developing Rating Watch pending clarity on the quantum, mode and timing of payment of the final buyout. In the meantime, MRCB Southern Link will channel its monthly interim payments towards meeting its Senior and Junior Sukuk financial obligations, notwithstanding the financial covenants related to payments under the Junior Sukuk.

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

Lee Chai Len

(603) 7628 1192

chailen@ram.com.my