FW: RAM Ratings downgrades Smart Holdings' sukuk rating to A1, maintains negative outlook

 

Published on 24 Jan 2018.

RAM Ratings has downgraded the rating of Projek Smart Holdings Sdn Bhd’s (Smart Holdings or the Company) IMTN Facility of up to RM330 million in nominal value (2015/2032) (the Sukuk) from AA2 to A1. This is premised on the Company’s deteriorating debt-servicing indicators following a persistent downtrend in traffic at the Stormwater Management and Road Tunnel Project (Smart Tunnel or the Tunnel). While the Tunnel had previously enjoyed strong annual traffic growth (CAGR of 13.3% in its first 7 years), since its toll rate hike in October 2015, traffic flow at the Tunnel has shrunk 30% (up to end-2017). The lower average daily traffic (ADT) has reduced the revenue and earnings of Syarikat Mengurus Air Banjir dan Terowong Sdn Bhd (SMART or the Concessionaire), and this has, in turn, crimped the residual cashflow available to service the Sukuk. 

Meanwhile, we have maintained the sukuk’ rating long-term outlook at negative to reflect our expectation of further rating pressure should traffic keep declining, especially with a step-up in the sukuk annual repayments from fiscal 2022 onwards.

While a turnaround in traffic performance over the medium to long term is probable, particularly given the impetus from the Tun Razak Exchange and Bandar Malaysia developments at either end of the Tunnel, we remain concerned about the Tunnel’s short-term performance. This is especially pertinent as 2 more rate hikes have been scheduled over the next 3 years. Our analysis assumes that the Company may register a minimum finance service coverage ratio (with cash balances, post-distribution) of 1.88 times, i.e. commensurate with an A rating, should traffic contraction abate and regularise with an average ADT of 22,483 vehicles over the next 3 years (ADT in 2017: 22,382 vehicles). Smart Holdings is currently in discussion with Gamuda Berhad and MMC Corporation Berhad (the shareholders) on ways to support the Company’s ability to honour its payment obligations under the Sukuk. 

Smart Holdings is the sole shareholder of SMART, which in turn is the Concessionaire for the Smart Tunnel. The Tunnel comprises the Stormwater Channel and Motorway; the construction and concession agreement spans 40 years from 1 January 2003. As with other toll concessionaires, SMART is inherently exposed to regulatory and single-project risks. 

 

Analytical contact
Adeline Poh
(603) 7628 1021
adeline@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my