Published on 21 July 2015
RAM Ratings has assigned AAA(bg/fg)/Stable
ratings to the Proposed Guaranteed RM1 billion Sukuk Murabahah Programme
to be issued by West Coast Expressway Sdn Bhd (West Coast or the
Company). The ratings reflect irrevocable and unconditional Kafalah from
AAA-rated Bank Pembangunan Malaysia Berhad and Danajamin Nasional
Berhad, which enhance the sukuk’s ratings beyond West Coast’s
stand-alone credit strength. The proposed sukuk, a syndicated term-loan
facility, a government support loan (GSL) and shareholders’ equity will
fund the West Coast Expressway (WCE or the Expressway).
The Expressway, a 316-km highway from Banting,
Selangor, to Changkat Jering in Taiping, Perak, will be the second
longest inter-state tolled expressway after the North-South Expressway
and is budgeted for completion within 5 years at a cost of RM5 billion.
Of the total length of the WCE, 233 km comes under the purview of West
Coast under the Concession Agreement, of which the engineering,
procurement and construction contract of the initial 193-km sections has
been awarded to a consortium comprising IJM Construction Sdn Bhd and
Kumpulan Europlus Berhad (KEuro) while the construction of a 40-km
stretch is deferred. Meanwhile, the remaining 83 km consists of
non-tolled existing roads to be upgraded by the Government of Malaysia,
concurrently with the construction of other sections.
“While IJM Construction has a track record in
building toll roads, the concurrent construction of a 193-km stretch
will be its largest toll-road project to date, which is a new feat to be
achieved. Soft-soil conditions along the coastal stretches, an elevated
section in Selangor, and large land acquisitions will be some of its
key construction challenges,” highlights Davinder Kaur Gill, Co-Head of
RAM’s Infrastructure and Utilities Ratings. “That said, in mitigating
such challenges, detailed soil investigations have been conducted since
2007, while some cost and timing provisions have been made,” she adds.
For land acquisition, the government will bear costs of up to RM980
million while any excess will be borne by West Coast.
The Company’s shareholders (KEuro and Road Builder
(M) Holdings Bhd) have irrevocably and unconditionally undertaken to
provide financial support to ensure the completion of the WCE, and a
cash-deficiency undertaking for up to RM400 million to meet shortfalls
in financial obligations. Project costs and financing sources are well
matched, leaving no room for construction delays or cost overruns.
Should the latter events take place, the WCE’s completion will be
dependent on shareholder support.
Upon completion, the WCE will be a shorter and
quicker option for north-south commuters along the west coast. Initial
traffic flow is expected to stem from daily commuters in Shah Alam and
Klang, who currently use toll-free roads. The WCE will also provide
improved connectivity by intersecting expressways such as the Shah Alam
Expressway, Federal Highway Route II, North Klang Valley Expressway,
South Klang Valley Expressway and the New North Klang Straits Bypass.
Over the longer term, the WCE is anticipated to facilitate a
socio-economic development agenda in sections of northern Selangor and
northern Perak which remain fairly undeveloped.
Based on RAM’s sensitised cashflow analysis, the
Company is not expected to generate sufficient pre-financing cashflow to
match its debt repayment obligations, necessitating the injection of
monetary support from its shareholders in the early years of the
proposed sukuk’s tenure. West Coast expects to refinance a lumpy
repayment of the syndicated term-loan facility by FY Mar 2028. On this
note, the long remaining life of the concession (at least 36 years)
provides room for such an exercise, and West Coast’s cashflow over the
concession period is expected to sufficiently support its debt
repayments. In addition, the GSL has been structured based on repayment
terms that do not constrain West Coast’s financials (i.e. low GSL
repayments during the proposed sukuk’s tenure).
As with most concession-related projects, the Company is exposed to regulatory and single-project risks.
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