MARC retains negative outlook on Kesturi's bonds

A common mistake: Concessionaires must invest in proper gateways to highways to avoid a poor accessibility and dispersal system.

KUALA LUMPUR: Malaysian Rating Corporation (MARC) has affirmed its rating on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) debt notes but maintained its negative outlook.

It said on Tuesday the negative outlook was mainly driven by the widening gap between the actual and projected traffic volumes in addition to declining cash reserves that have led to lower project coverage compared to initial forecast figures. 

“The outlook also considers the concessionaire’s reliance on timely government cash compensation in the absence of periodic implementation of toll hikes. While the government had announced compensation in lieu of deferred toll hikes for 2019, MARC views this as an interim measure,” it said in a statement. 

MARC said downward pressure on the ratings could develop if the traffic ramp-up at Duta Ulu-Kelang Expressway (DUKE) Phase-2 D is slower than expected, resulting in an erosion of cash flow coverage.

The rating agency affirmed its ratings of AA-IS and A- on Kesturi's RM2.3bil sukuk musharakah (senior sukuk) and RM180mil redeemable secured junior bonds.

“The three-notch rating differential between the senior sukuk and junior bonds reflects the latter’s subordination to the senior sukuk in regard to security ranking and payment priority. The outlook on the ratings remains negative,” it said.

MARC said the ratings affirmation considers the improvement in traffic performance after DUKE Phase-2 started operations and the project’s manageable debt maturity profile.

DUKE Phase-2 commenced full operations following the opening of Tun Razak Link (TRL) on Sept 28, 2017 and Sri Damansara Link (SDL) on Oct 23, 2017. 

The new extension has improved the highway’s connectivity to western Kuala Lumpur and the city centre while reducing traffic congestion on Middle Ring Road 2 (MRR2).

Moderating the ratings are the highly leveraged capital structure as well as the limited capacity of DUKE Phase-1 to accommodate future growth during peak hours.

In financial year ended June 30, 2018 (FY2018), Kesturi’s overall traffic volume grew by 37.8% on-year, mainly contributed by the opening of TRL and SDL. 

The spillover traffic from these two additional routes led to an annual growth of 3.0% and 10.2% at the Batu toll plaza and Sentul toll plaza. 

Excluding DUKE Phase-2, total traffic grew by 2.6%, dragged down by declining traffic at the Ayer Panas toll plaza. 

The traffic slowdown is attributed to bottlenecks at the toll plaza exit in the direction of the city centre caused by ongoing construction works along Jalan Semarak and commuters’ preference for using TRL in their daily commute to the city centre.

Notwithstanding the growth in toll revenue, Kesturi recorded its first pre-tax loss since 2014 due to higher financing cost of RM121.8mil (FY2017: RM81.7mil). 

The concessionaire’s cash flow from operations stood higher in FY2018 supported by better working capital management. 

Coupled with lower capex, Kesturi recorded a turnaround to positive free cash flow of RM59mil (FY2017: negative RM117.6mil). Its debt-to-equity ratio deteriorated to 10.71 times on the back of higher borrowings due to the fair value increase on the Senior Sukuk and Junior Bonds.

“Of more concern to the rating agency is the increasing deviation of actual traffic volumes from the forecast figures. 

“With the exception of SDL, traffic at the toll plazas came below the projections, ranging from 10.8% to 49.7%. 

“As a result, MARC has revised the base case traffic projections by reducing the traffic growth rates accordingly. Under this rating case scenario, Kesturi’s forward-looking Senior finance service cover ratio (FSCR) with cash averages 4.26 times with a minimum coverage of 1.93 times occurring in FY2025.

“Excluding cash buffer, the concessionaire can only withstand further traffic growth reductions of 15% (between FY2019 and FY2023) and 5% (between FY2024 and FY2033) to break even in FY2023. 

“Any further decline in traffic growth will likely create a heavy reliance on Kesturi’s cash reserves and government cash compensation in lieu of toll hike deferrals, as the operational cash flow averages RM208.3mil vis-à-vis debt obligations of RM181.4mil between FY2019 and FY2023,” MARC pointed out.


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