FW: MARC AFFIRMS ITS AA-IS RATING ON DUKE 3'S RM3.64 BILLION SUKUK

 

P R E S S  A N N O U N C E M E N T

 

FOR IMMEDIATE RELEASE

 

MARC AFFIRMS ITS AA-_IS RATING ON DUKE 3’S RM3.64 BILLION SUKUK

 

MARC has affirmed its rating of AA-_IS on Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah with a stable outlook.

 

DUKE 3, a wholly-owned subsidiary of Ekovest Berhad (Ekovest), is the concessionaire of the 32.1km DUKE Phase 3 expressway in Kuala Lumpur under an agreement with the Malaysian government ending August 5, 2069. The expressway is currently under construction and will connect the Middle Ring Road 2 at Wangsa Maju to the Kerinchi Link adjoining the Federal Highway upon completion.

 

The rating affirmation factors in the sufficient progress made on the construction and the adequately structured sukuk repayment profile that accommodates the traffic ramp-up of the DUKE Phase 3 expressway. Moderating the rating are project completion and traffic demand risks as well as regulatory risk in relation to toll hikes. Project completion risk is largely mitigated by the reasonable 42-month construction timeline and the relevant experience of turnkey contractor Ekovest.

 

The overall progress of the DUKE Phase 3 expressway stood at 3.32% as at end-June 2017, against scheduled progress of 7.00%. The slower progress has been mainly attributed to delays in highway design works. However, the targeted completion date remains unchanged on December 31, 2019 as the progress shortfall is expected to narrow with additional manpower during structural works. Should there be any cost arising from the delay, it would be passed to the contractor through the back-to-back liquidated ascertained damages arrangement under the fixed-sum contract.

 

In respect of land required for construction of the expressway, DUKE 3 has access to 96.5% of the 553.3-acre project site with the remaining accessibility to be obtained after the compulsory acquisition hearing in September 2017. Financial risk associated with land acquisition is minimised by sizeable government funding of up to RM350 million for land purchases.

 

As at July 31, 2017, DUKE 3 has incurred RM751 million on the project while designated account balances stood at RM3.8 billion. MARC opines that a timely disbursement of reimbursable interest assistance (RIA) totalling RM560 million from the government is crucial to meet the project payment milestones. The first scheduled RIA payment of RM100 million was only received in July 2017. DUKE 3 has yet to receive the second RIA payment of RM250 million scheduled in 2017 while the final RIA disbursement of RM210 million is scheduled in 2018. If the RIA payments are not forthcoming by end-2018, DUKE 3 could face challenges in meeting the project cost estimated at RM5.0 billion.

 

DUKE 3’s project cash flow coverage has been unchanged since the rating was first assigned. The average finance service cover ratio (FSCR) of 2.46 times during the sukuk tenure is supportive of the current rating level. MARC’s sensitivity analysis also indicates that DUKE 3’s FSCR would remain resilient under adverse scenarios. The project cash flow can withstand up to 11% construction cover overrun or up to 12 months’ delay in the tolling operations date before breaching the FSCR covenant of 1.50 times in 2023 and 2026 respectively.

 

The stable outlook incorporates MARC’s expectation that the construction of the DUKE Phase 3 expressway will be largely on schedule and within budget. Downward pressure may arise if DUKE 3 experiences a liquidity crunch due to a protracted delay in disbursement of the RIA from the government.

 

Contacts: Ng Chun Kean, +603-2717 2940/ chunkean@marc.com.my; David Lee, +603-2717 2955/ david@marc.com.my.

 

August 24, 2017