FW: RAM Ratings downgrades rating of MRCB Southern Link’s Senior Sukuk, maintains negative Rating Watch

 

Published on 26 Sep 2018.

RAM Ratings has downgraded the long-term rating of MRCB Southern Link Berhad's (MRCBSL or the Company) RM845 million Senior Sukuk to C1 from BB3. At the same time, we have maintained the Rating Watch on the issue rating, with a negative outlook. Our rating action is premised on the heightened default risk of the sukuk following the abolishment of toll collections at the 8.62-km Eastern Dispersal Link (EDL or the Expressway) since 1 January 2018, and the takeover of the Expressway by the Government of Malaysia (GoM). The Company's inability to collect toll from the Expressway has dwindled its cash reserves. MRCBSL's remaining cash balance is insufficient to honour its RM74.6 million of financial obligations due under the sukuk within the next three months, i.e. between 21 and 24 December 2018.

While negotiations are still ongoing between the EDL's toll concessionaire – MRCB Lingkaran Selatan Sdn Bhd – and the GoM to mutually terminate the Expressway's Concession Agreement and determine a final settlement amount, no formal agreement has been inked to date. We have maintained the negative Rating Watch on the sukuk to reflect its potential downgrade to D if the Company were to be unable to honour its upcoming semi-annual sukuk repayment due between 21 and 24 December 2018 without any external liquidity support, including the receipt of the financial cash settlement from the GoM to the concessionaire. 

In the meantime, MRCBSL continues to engage with its sukukholders and sukuk trustee; the sukukholders have already granted the Company an indulgence on meeting its covenants up to 20 December 2018. This comes alongside their consent to not declare an event of default while negotiations are underway. Should negotiations conclude within the next three months, the sukuk is expected to be redeemed early upon the receipt of the cash settlement amount by the toll concessionaire. 

MRCBSL's financial commitments are supported by back-to-back payments from MRCB Lingkaran Selatan Sdn Bhd - the concessionaire of the EDL. Given the strong credit link between MRCBSL and the concessionaire, we view both companies in aggregate from a credit standpoint. MRCBSL is a funding conduit for the Expressway.

RAM's Rating Watch highlights a possible change in an issuer's sukuk rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated sukuk under special surveillance by RAM. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and profit.

Issues will appear on RAM's Rating Watch when some of the above events are expected to occur or have occurred. Appearance on RAM's Rating Watch, however, does not inevitably mean that the rating will be changed. It only means that a rating is under evaluation by RAM and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A "developing" outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

 

Analytical contact
Chinthamani Thanneermalai
(603) 7628 1013
chinthamani@ram.com.my

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