RAM Ratings has reaffirmed the rating of MRCB Southern Link Berhad’s (MRCB Southern Link or the Company)’s RM845 million Senior Sukuk at BB3 with a negativ

Published on 19 October 2016

RAM Ratings has reaffirmed the rating of MRCB Southern Link Berhad’s (MRCB Southern Link or the Company)’s RM845 million Senior Sukuk at BB3 with a negative outlook. While we remain concerned about the Company’s strained liquidity position, the Bursa Malaysia announcement made on 14 October 2016 could pave the way for a longer term solution. In this announcement, Malaysian Resources Corporation Berhad (ultimate shareholder of MRCB Southern Link) received 2 indicative offers for the 8.62-km Eastern Dispersal Link (EDL or the Expressway), one from PLUS Malaysia Berhad and another from an undisclosed client represented by ZJ Advisory Sdn Bhd to acquire its equity interest in MRCB Lingkaran Selatan Sdn Bhd (MRCB Lingkaran Selatan or the Concessionaire). Given the persistent mismatch between the Company’s cash generating ability and annual debt repayments (owing to weak traffic volumes since commencement of tolling at the EDL), the rating of the sukuk could be downgraded in the coming months should the indicative buyout offers not materialise and/or the Company not make any headway in its refinancing plans.
On that note, the Company had sought lenders approval to defer a principal payment under its term loan facility from July 2016 to November 2016, stemming from insufficiency of funds. Given the Company’s persistent tight liquidity position, we do not discount further deferral of principal payments under the term loan. Despite this, we have been informed that the profit payments under the Senior Sukuk will continue to be paid on its due date.
As at end-September 2016, the Company’s cash balances stood at RM30.03 million. Coupled with the MRCB Southern Link’s operating cashflow over the next few months, the Company should have sufficient internal funds to meet its dues under the term loan in November 2016. Thereafter, our analysis assumes the drawdown of the Company’s RM59.35 million finance service reserve account bank guarantee to help allay the cash shortfalls in honouring its financial obligations till January 2018 (over the next 15 months), before again facing a cashflow shortfall in repaying its term loan. Any default on the term loan will result in a cross-default on the Senior Sukuk as they rank pari passu in terms of cashflow and security. 
Lower-than-expected traffic volumes since the commencement of tolling in August 2014 have undermined MRCB Lingkaran Selatan’s projected toll revenue. Average daily traffic (ADT) on the Expressway came in marginally below expectations at 43,412 vehicles in 2015 (RAM’s projection: 43,723 vehicles). ADT declined a further 1.6% to 42,716 vehicles for 9M 2016 and is anticipated to decrease by 1.8% in 2016 in view of the volatility of traffic.
MRCB Southern Link is a funding conduit for the EDL. The Company’s financial commitments will be supported by back-to-back payments from MRCB Lingkaran Selatan. Recognising the strong credit link between the 2 entities, we view them in aggregate from a credit standpoint.

Analytical contacts                                            Media contact
Chinthamani Thanneermalai                               Padthma Subbiah
(603) 7628 1013                                                  (603) 7628 1162
chinthamani@ram.com.my                                 padthma@ram.com.my