RAM Ratings reaffirms AA3 rating of Besraya’s RM700 million sukuk

Published on 30 July 2013

RAM Ratings has reaffirmed the long-term AA3 rating of Besraya (M) Sdn Bhd’s (“Besraya” or “the Company”) RM700 million Sukuk Mudharabah Issuance Facility (“the Sukuk”), with a stable outlook. Besraya is the toll concessionaire for the 16.6-km Sungai Besi Highway (“SBH”) and the 12.3-km Besraya Eastern Extension (“BEE”) that is currently under construction (the 2 routes are collectively known as “the Highways”); the concession will expire on 15 May 2040. The rating reflects the ready traffic from surrounding areas and Besraya’s strong debt-coverage levels. These positives are, however, moderated by the construction risk of the BEE, competition from existing and new roads, regulatory and single-project risks.

RAM’s analysis shows that Besraya should generate about RM80 million of annual pre-financing cashflow on average throughout the Sukuk’s tenure; this translates into a minimum finance service coverage ratio (“FSCR”) of 2.00 times (with cash balances, post-distribution on payment dates) – a level commensurate with the rating. That said, it is crucial that Besraya retains a sufficient cash buffer before making any distributions to its shareholders in the next 1-2 years, in view of uncertainties such as higher-than-expected construction costs, the timing of the BEE’s completion and its ability to increase toll rates for the SBH in 2014. Any unfavourable turn in such events may exert pressure on its rating.

The SBH, which straddles densely populated townships and industrial areas such as Salak Selatan, Seri Kembangan and Serdang, provides ready traffic demand. This will be complemented by the BEE, which will improve connectivity between the southern and eastern corridors around Kuala Lumpur. Although the SBH’s average daily traffic remained flat and within our expectations at 91,424 vehicles in FY Mar 2013, we opine that the Highways will enjoy more visible long-term growth potential upon the completion of the BEE.

Meanwhile, overall construction of the BEE was within schedule as at end-March 2013. However, a land acquisition along the Middle Ring Road 2 Link, in which negotiations were recently settled, took longer than expected and caused a delay. Despite so, Besraya still aims for completion by January 2014 and tolling to commence the following month (as scheduled); RAM’s sensitised analysis assumes a 6-month delay, i.e. tolling starts in August 2014. We will monitor developments closely; any events that might potentially cause a delay would warrant a rating reassessment. Meanwhile, construction cost has exceeded the budgeted amount by RM27 million, a result of an earlier variation order from the realignment and previous land-acquisition cost overruns. Besraya’s debt-servicing aptitude is expected to remain intact, supported by cashflow from the SBH.

The Highways face competition from the Maju Expressway, the KL-Seremban Highway and alternative toll-free routes – as evinced by the SBH’s historical traffic volumes – although fuel prices, travelling time and tariffs greatly determine commuters’ preferences. While recent news has surfaced on a potential interchange in Seri Kembangan by an alternative expressway that may divert some traffic from the SBH, this will only be factored into our traffic projections, pending more clarity on the interchange, as well as on the BEE’s ADT and toll rates upon its completion.

Regulatory risk is an inherent feature for the toll-road industry, as underlined by the Government of Malaysia’s decision to postpone the SBH’s scheduled toll-rate revision in 2013 by a year. Nevertheless, this is accompanied by RM12 million (or 50%) of monetary compensation received to date. Our analysis suggests that the Company’s debt-servicing ability may be compromised should it not be compensated with cash for non-revision of tariffs, or if the BEE does not start tolling with a tariff of RM2.00 for Class 1 (passenger) vehicles.

Media contact

Chin Wynn

(603) 7628 1170

chinwynn@ram.com.my