MARC AFFIRMS RATINGS ON SPRINT’S ISLAMIC SECURITIES AT A+ID AND BANK-GUARANTEED BONDS AT AA-(bg)

                       

FOR IMMEDIATE RELEASE

MARC has affirmed its A+_ID and AA-_(bg) ratings on Sistem Penyuraian Trafik KL Barat Sdn Bhd’s (SPRINT) RM510 million Al Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM365 million Bank-Guaranteed Serial Fixed Rate Bonds (BG bonds) respectively. The outlook on the ratings is stable. The RM510 million BaIDS will commence its yearly repayment in 2016 while the outstanding RM41 million BG bonds are scheduled to be fully repaid by 2017. SPRINT is the owner and concessionaire of three interlinked highways, namely the Damansara Link, Kerinchi Link and Penchala Link which were designed to ease traffic congestion in western Kuala Lumpur.

The AA- rating on the BG bonds reflects the lowest financial institution rating from MARC on the three guarantor banks of the bonds, namely Public Bank Berhad, AmInvestment Bank Berhad and RHB Bank Berhad, in line with the rating agency’s weakest link approach. MARC maintains non-solicited ratings on the three banks based on information in the public domain. The A+ rating on the BaIDS is underpinned by the adequacy of SPRINT’s actual and projected cash flows from its relatively matured highways to meet the debt service obligations. Constraining the rating on the BaIDS are the aggressive debt repayment schedule from 2017 onwards and the risk of toll hike deferrals.

SPRINT’s three highways implemented their first toll hikes in October 2015, with the new toll rates in line with the concession agreement (except for buses on all links and Class 1 vehicles on Kerinchi Link). Given the sharp increase in toll rates which had incorporated overdue scheduled toll increases, MARC expects SPRINT’s traffic flow to exhibit higher elasticity of demand among existing toll users. This could affect traffic volume over the near term.

For the first ten months of 2015 (10M2015) which includes 16 days of the new toll rates, SPRINT recorded a higher traffic growth of 4.7% compared to 4.1% in the previous corresponding period. Average daily traffic (ADT) at Damansara Link increased to 56,166 vehicles/day (10M2014: 55,153) as the Klang Valley Mass Rapid Transit (MRT) construction works neared completion. The improvement in traffic performance also led to a lower negative traffic variance against forecast of 2.1% in 10M2015 (10M2014: negative 5.0%). Kerinchi Link also recorded better-than-expected ADT of 96,226 vehicles/day in 10M2015 (10M2014: 90,522) compared to the ADT forecast, mainly due to the toll hike deferments. Penchala Link, however, showed an unexpected slowdown in ADT growth of 4.9% in 10M2015 (10M2014: 11.8%) vis-a-vis a projected growth of 8.2%, which suggests that its traffic profile may have entered a matured growth phase.

For financial year ended March 31, 2015 (FY2015), SPRINT’s revenue grew to RM207.1 million (FY2014: RM179.9 million) contributed mainly by Penchala Link and Kerinchi Link which have higher toll rates compared to Damansara Link. SPRINT also recorded higher operating profit of RM127.1 million (FY2014: RM109.1 million) following the recognition of government compensation in lieu of toll hikes in January 2015. Damansara Link’s revenue contribution is expected to decrease gradually due to its lower toll rate, unidirectional tolling and limited capacity for traffic growth. Penchala Link remains the highest contributor at approximately 44.9% of SPRINT’s toll revenue followed by Kerinchi Link at 39.5%.

In line with the higher revenue, SPRINT’s cash flow from operations improved by 3.2% y-o-y to RM156.8 million in FY2015. SPRINT’s current cash flow generation and its adequate liquidity of RM170.2 million as at October 31, 2015 are sufficient to support its debt obligations over the next two years. Additional comfort is derived from the remaining RM25.0 million shareholders’ undertaking to fund the debt reserve account should the need arise. Despite projecting an average debt service cover ratio (DSCR) of 2.96 times for the FY2016-FY2019 period, SPRINT will need to prudently manage its cash flows as its overall traffic is likely to further trail projections in the near to intermediate term. Its DSCR is most vulnerable in FY2018 following the repayment of financial obligations of RM170.4 million and RM212.2 million in FY2017 and FY2018 respectively.

The stable outlook on the BaIDS assumes SPRINT will maintain its financial metrics that are commensurate with its current rating. MARC will continue to assess the impact of the October 2015 toll increase on SPRINT’s traffic performance. Downward pressure on the rating and/or outlook could develop if SPRINT’s project cash flow coverage erodes significantly as a result of severe traffic underperformance. Any changes to the rating and outlook of the BG bonds would largely be driven by changes in the credit quality of the guarantor banks.

Contacts: Ng Chun Kean, +603-2082 2230/chunkean@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

March 24, 2016