Malaysia Toll Road Bond Roundup_19 Aug 2015

MY Toll Road Bond Roundup

• Toll road bonds with good credit are generally well-received due to i) moderate supply, ii) diversification from power sector in project finance, iii) steady cash flow generation backed by concession, and iv) bondholder protection features.
• Regulatory risk is inherently high for toll road bonds as there continues to be uncertainty regarding toll rates since the government began deferring scheduled toll hikes since 2008.
• We expect traffic and revenue growth to remain positive in 2015 on the back of flattish fuel prices and no toll rate hike thus far, but may face challenges in view of slower economic growth in 2H2015.
• As most toll road names are exposed to single-asset and geographical risk, we prefer to stick to the names with established catchment traffic and strong debt coverage metrics.
• We are somewhat cautious against newer toll road lacking track record with cash flows metrics highly contingent on above-average future traffic growth as such names are more affected by demand risks amid economic headwinds and are more susceptible to rating downgrade or bond restructuring risks arising from the underperformance of traffic growth.
• Credit Strategy:

Ø        Top picks for strong credit are PLUS (AAA), Kesas (AA2) and Anih (AA) for their robust debt service coverage, strong restricted payment covenants and healthy traffic growth. The implicit government support for PLUS adds to its attractiveness.
Ø        We are comfortable with Litrak (AA2). We like the toll road profile of Bright Focus (AA2) and its modest cash flow coverage metrics but the name is weighed down by high gearing and holding co structure.
Ø        We view Cerah Sama (AA-), Besraya (AA3) and Kesturi (AA-) as having similar strength. But we are mindful of the traffic performance of Cerah Sama as it registered negative growth in 9MFY14 due to MRT works and competition from MRT upon completion.

• Credit Outlook: All the toll road bonds in the selection carry a stable outlook from RAM or MARC, except for MRCB Southern Link which has a negative outlook.
• Credit Update: PLUS toll rates are up for review in 2016 with news reporting there may be a 5% increase in rates.