MARC ASSIGNS PRELIMINARY RATING OF AA-IS TO GRAND SEPADU (NK) SDN BHD’S PROPOSED SUKUK MURABAHAH ISSUANCE OF RM210 MILLION; OUTLOOK STABLE

MARC has assigned a preliminary rating of AA-_IS to Grand Sepadu (NK) Sdn Bhd’s (Grand Sepadu) proposed issuance of RM210.0 million Sukuk Murabahah (sukuk). The outlook on the rating is stable. The proceeds from the issuance will be mainly utilised to facilitate the roll-over of Grand Sepadu’s existing bridging loan of RM200 million that was taken to part-finance the acquisition of assets and concession rights of the New North Klang Straits Bypass Expressway (NNKSB). Grand Sepadu acquired the concession for RM265 million in December 2014. The 17.5-kilometre NNKSB highway commences from the North Port intersection to the New Klang Valley Expressway interchange at Bukit Raja in Klang.

The assigned rating reflects the matured and fairly stable traffic profile of the NNKSB highway, and Grand Sepadu’s moderate leverage and adequate debt service coverage ratio. The rating is moderated by the susceptibility of traffic performance to competing non-tolled roads at some stretches of the NNKSB highway and to a slowdown in industrial activities that may affect traffic flow to North Port. In addition, Grand Sepadu relies heavily on scheduled toll rate hikes, or, in lieu of this, timely government compensations to maintain its debt service coverage levels.

  

Grand Sepadu, which changed its name from Jejak Melewar Sdn Bhd, is a joint-venture company in which Bursa Malaysia-listed Taliworks Corporation Berhad has a 75% indirect interest. Following the acquisition of the NNKSB’s assets and concession rights from Lebuhraya Shapadu Sdn Bhd (in liquidation), the concession tenure was extended to 2032. Traffic volume on the NNKSB grew by an average of 1.6% per year over the last five years; the modest growth reflects the matured traffic profile as well as the availability of competing non-tolled roads, mainly the North Klang Straits Bypass road (NKSB). Nonetheless, MARC views that as a single-lane dual-bound road, NKSB may have limited capacity to pose a major threat to NNKSB’s two- and three-lane dual carriageways. For 2014, the average daily traffic (ADT) increased to 87,531 vehicles/day, collecting about RM41.1 million of toll revenue (2013: 86,556 vehicles/day; RM40.2 million).

MARC notes that given the direct access to North Port from the NNKSB, commercial vehicles comprise about 40% of traffic demand at two of NNKSB’s four toll plazas, accounting for 34% of the highway’s total toll collection. However, as commercial traffic tends to exhibit higher elasticity to toll rate hikes, any negative impact on the traffic volume from toll rate increases will become more apparent on commercial traffic volume. Toll revenue grew at an average of 2.8% per year for the past five years, mainly attributed to the high composition of commercial vehicles which command higher toll rates.

According to the independent traffic consultant’s report, traffic on the highway is forecast to grow at a compound annual growth rate (CAGR) of 2.4% during the concession tenure. This takes into account potential traffic inflows on to the NNKSB following the proposed improvement to be undertaken on the highway as well as population growth along the highway’s catchment areas. The projected CAGR is deemed to be aggressive compared to the actual traffic volume recorded over the past five years. Nonetheless, Grand Sepadu’s moderately leveraged capital structure and liquidity buffer afford some headroom to withstand any traffic underperformance.

Grand Sepadu will have a pro forma debt-to-equity ratio of 2.95 times and cash balances of RM23.5 million as at end-December 2015 upon the issuance of the sukuk. MARC’s sensitivity analysis demonstrates that Grand Sepadu’s cash flow is able to withstand a traffic volume reduction to an average ADT of 76,200 vehicles/day without breaching its covenanted finance service cover ratio (FSCR) of 1.75 times. However, as the scheduled toll rate hikes of between 20% and 30% are key drivers of anticipated revenue growth, any toll rate hike deferments or delays in the receipt of government compensation in lieu of scheduled toll hikes could constrain Grand Sepadu’s liquidity. The toll rate hikes are scheduled in January 2016, January 2020 and January 2025.

The rating agency also notes that Grand Sepadu’s ability to retain a comfortable liquidity buffer will largely depend on its dividend policy, in particular between 2017 and 2022 when financing obligations are the highest. However, Grand Sepadu’s restrictive post-distribution FSCR of 1.75 times will provide sukukholders with adequate protection against excessive cashflow leakages.

The stable outlook incorporates MARC’s expectations that the toll road concession will generate stable cash flows to service the sukuk. Any significant deviation in Grand Sepadu’s traffic performance or delays in implementing the scheduled toll rate hikes without timely compensation will exert downward pressure on the rating and/or outlook.

Contacts: Izyani Saad, +603-2082 2256/ izyani@marc.com.my; David Lee, +603-2082 2255/ david@marc.com.my.

April 29, 2015