RAM Ratings reaffirms MRCB Southern Link's Senior and Junior Sukuk ratings

Published on 24 July 2015

RAM Ratings has reaffirmed the ratings of MRCB Southern Link Berhad’s (MRCB Southern Link or the Company) RM845 million Secured Senior Sukuk (2008/2025) (Senior Sukuk) and RM199 million Junior Sukuk (2008/2027) (Junior Sukuk) at BB1 and B1, respectively. The negative outlook on both ratings signals the potential for further deterioration in the ratings as a result of a weaker cashflow position should there be any delay in its refinancing exercise. The differential between the ratings of the Senior and Junior Sukuk reflects the Junior Sukuk’s subordinated status from a legal perspective.

MRCB Southern Link is a funding conduit for the 8.62-km Eastern Dispersal Link (EDL) in Johor Bahru.

The reaffirmation of the ratings is premised on the inroads that the Company has made with a debt-refinancing exercise. If the Company fails to complete the refinancing exercise by end-2015, a default on the Junior Sukuk is expected at end-December 2016, and a default on the Senior Sukuk at end-June 2019. As such, the ratings of the sukuk will face downward pressure if the refinancing exercise is not concluded by the end of the year. Elsewhere, as an interim measure to stave off a liquidity crunch, the Company procured bank guarantees (BG) amounting to RM90 million on 27 January 2015 to substitute the cash reserves in its finance service reserve accounts (FSRAs). As such, the Company was able to utilise these cash reserves for ongoing debt repayment as well as to support working-capital requirements.

Since the commencement of tolling on the EDL on 1 August 2014, the Expressway’s monthly traffic volume has been volatile owing to toll-rate hikes on the JB-Singapore Causeway and the higher Vehicle Entry Permit fee imposed by the Singapore government. Compared to the last 5 months of 2014, the annualised average daily traffic (ADT) on the EDL had declined 1.7% in the first 5 months of 2015. We anticipate a minor contraction in the volume of traffic on the EDL for 2015. Thereafter, we expect ADT growth to recover to between 2% and 3% per annum in 2016 and 2017, respectively. Elsewhere, the VEP fee planned by the Government, which has yet to be formalised, may negatively impact traffic volume on the EDL.

Given the initial underperformance of traffic on the EDL in 2014 subsequent to the imposition of toll charges and our expectations of future traffic, the Company is envisaged to face liquidity stress. MRCB Southern Link will have to draw down the Junior Sukuk Special Reserve Account BG (of RM20.43 million) by end-2015 to provide the Company with temporary liquidity respite.

Media contact

Chinthamani Thanneermalai

(603) 7628 1013

chinthamani@ram.com.my