HIGHER traffic volumes, better business fundamentals and sounder financial structures are giving the bonds issued by toll road operators higher ratings.
The re-rating of the bonds of highway concessionaires like Projek Lebuhraya Utara-Selatan Bhd (Plus) to triple A from single A previously and Ekspressway Lingkaran Tengah Sdn Bhd (Elite) to AA3, has lowered their cost of financing, prompting more interest from prospective players looking for project financing.
Despite the attraction of the equity market in raising funds, the bond market continues to be an attractive source of funding for projects with a long gestation period, particularly if given a good rating.
Rating Agency Malaysia Bhd (RAM), which has upgraded most of its ratings for the private debt securities (PDS) of existing toll operators over the past two years, therefore expects new players to tap the PDS market, especially with the revival of several such projects by the government recently.
Pointing to the much more positive scenario, RAM’s infrastructure and utilities ratings manager Joyce Loh said the upgrades had been on the back of genuine and sizable improvements in risk profiles.
While financing for toll roads may have been a bit of a gamble in the past, with some operators defaulting on their borrowings after choosing inappropriate structures that fail to take into account the early low traffic volumes and cash flow, “the fundamentals seem to have changed” she told StarBiz.
In 2002, RAM assigned a AAA rating to Plus and AA3/P1 ratings to Kesas Sdn Bhd, Lingkaran Trans Kota Sdn Bhd (Litrak) and Grand Saga Sdn Bhd, while early this year, it assigned AA3 to Elite. Since 1992, RAM had rated 35 debt issues from 11 toll road operators with a combined value of over RM44bil.
Loh said the business and financial risk profiles of many toll operators have changed significantly to warrant higher ratings than previously possible.
Among others, the higher traffic flows in the later years of operations after the early “traffic ramp-up period” played a major part in the upgrades.
“After a slow start, most toll roads, especially within the congested Klang Valley, tend to demonstrate high growth rates between the second and fifth years of operations from growing public acceptance and the low-base effect,” she said.
Intra-urban toll road companies like Elite, Kesas, Litrak, Grand Saga and Besraya were now in the semi-mature phase, having had operating track records of between 4 and 7 years, she said. Their operating risk profiles have “stabilised.”
The same had happened to Plus and Penang Bridge Sdn Bhd which have longer operating records of between 9 and 18 years, she added.
Loh was the author of a recent RAM report that predicted a growing demand for PDS issues from new toll operators.
With the government reviving projects such as the West Coast Expressway, KL North-east Expressway, KL-Putrajaya Highway and Kajang-Seremban Highway, the interest in bond issues for the major infrastructure projects would also increase, it said.
According to RAM, the requirements for sizable funds in projects with long gestation periods will be ideally suited for the PDS market. “It would obviously be a good avenue,” it said.
Loh, however, warned that how a project was structured could affect ratings, particularly in the early years. It had to be “well-configured,” she said, to avoid falling into the same traps of the earlier projects.
This had been a problem in the past when many toll roads had “unsuitable financing structures” based on floating rate instruments with relatively short tenures of not more than 7 years.
Worse, principal repayments had been scheduled to commence immediately after the completion of the toll roads, exerting undue pressure on the young project, she said.
“As a result some companies then paid the price during the scourge of the Asian financial crisis in 1997/98, which gave rise to the combined problems of poor initial traffic volumes, rampaging interest rates and substantial principal repayments.”
While traffic volume risk was the most critical factor for toll road operations, construction risk was the predominant risk factor for non-operating toll road, Loh said.
Cost overruns and delays were their main components.
Other risks, which were considered, include regulatory risk, operations and maintenance risk and financial risk.
In the latter, Loh said that although profitability of toll roads were generally “robust” with operating margins as high as 90%, the main causes of financial distress arise from lower than expected revenues or highly aggressive financing structures.
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