MARC PLACES MAJU EXPRESSWAY SDN BHD’S RM550 MILLION IMTN PROGRAMME RATING OF AA-ID ON MARCWATCH NEGATIVE

Sep 5, 2013 -

MARC has placed its AA-ID rating on Maju Expressway Sdn Bhd’s (MESB) RM550.0 million Islamic Medium Term Notes (IMTN) Programme on MARCWatch Negative. MESB holds the concession for the 26-kilometre Maju Expressway (MEX) which links the Kuala Lumpur City Centre with Putrajaya and Cyberjaya.

This action is precipitated by 1) concerns over expected increases in financial leverage both at the parent and subsidiary level, 2) potential pressure from parent entity, Bright Focus Berhad (Bright Focus), to return surplus cash to shareholders following the parent's announced proposed sukuk issuance of up to RM1.35 billion and 3) delay in the provision of the necessary information requested by MARC on the part of MESB to enable the rating agency to complete its scheduled annual rating review of the IMTN issuance. Bright Focus is expected to use part of the proceeds from the proposed issuance to fund the purchase of MEX's outstanding RM550.0 million rated notes. The balance is expected to be used for the construction of the expressway's new Sri Kembangan interchange and toll plaza as well as to meet Bright Focus’ funding requirements. The construction of the new interchange will also raise the project's risk profile given that the proposed new interchange introduces near-term construction risk and uncertainty into the expressway's future traffic demand profile and revenue forecasts. At this time, MESB has not made available the revised traffic forecast incorporating the impact of the new interchange to MARC.

Notwithstanding  the structural subordination of the parent's debt to the subsidiary's obligations, the proposed issuance, if completed, will likely result in a demanding dividend policy and lower retained cash flow at MESB in addition to tightening finance service cover ratio (FSCR) headroom for the current rating level of 'AA-'. Post-issuance, both entities will rely on the cash flow stream generated by MEX to support consolidated debt of RM1.35 billion at Bright Focus' group level as opposed to MEX's only current outstanding RM550.0 million notes under the rated programme at operating subsidiary level. Furthermore, MESB's leverage is expected to increase on account of the advances that will be made by the parent to the 96.8% owned subsidiary to fund the construction of the new interchange. As a result of the expected increase in consolidated leverage, debt service protection margins would foreseeably be reduced, lowering MESB's resilience in the event actual traffic and revenue are significantly lower than projections.

Additionally, MESB's maintenance of liquidity and cash flow metrics at levels commensurate with its current rating level will increasingly depend on the prompt payment of cash compensation from the government for the deferment of its scheduled 2013 toll increases. The scheduled toll rate hikes of between 33% and 40% were to be a key driver of anticipated revenue growth. While the deferment of the toll rate hikes is expected to support user affordability, the uncertain timing of collection from the government will predispose MESB to cashflow mismatch risk. Any material delays in the receipt of government compensation will impinge on MESB's liquidity as could any other significant cash outflows not previously incorporated in the company's financial projections. On a related note, MARC had raised concerns in its September 2012 rating review about unbudgeted cash outlays by MESB in relation to the proposed extension of MEX to Kuala Lumpur International Airport (KLIA) which contributed to a higher-than-expected use of liquidity resources on its balance sheet.

MARC has extended its review of MESB’s programme rating for an additional 60-day period after the issuer indicated yesterday that they will provide the requested information in the next few days. The rating agency plans to resolve the MARCWatch placement within the next two months upon updating its reviews on MESB’s credit profile. In the event the requested information is not forthcoming, MARC will resolve the MARCWatch placement by completing its review based on the information available to the rating agency and withdraw the last assigned rating.

Contacts:

Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;

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