Tuesday November 20, 2012
Highway sukuk on MARCWatch
MARC says weak traffic volumes and claims the reason for move
PETALING JAYA: Malaysian Rating Corp Bhd (MARC) has put Senai-Desaru Expressway Bhd's (SDEB) RM1.89bil nominal value senior sukuk ijarah medium term notes programme and its RM3.69bil nominal value junior sukuk ijarah medium term notes programme on MARCWatch negative.
SDEB is the concession holder for the Senai-Pasir Gudang-Desaru Expressway, with the highway codename E22.
MARC said in a press release that the MARCWatch Negative placement is due to the E22's weak traffic performance since commencing full operations after the opening of Package 3 in July 2011.
“Traffic volumes have turned out to be as much as 40% below the traffic forecast and observed trends in traffic volumes suggest an increasing likelihood that E22's traffic performance and SDEB's cash flow generation will remain under pressure for longer than previously anticipated,” the press release stated.
MARC noted that based on its observations, the upturn in traffic volumes post-opening of the entire highway anticipated in E22's traffic forecast “has remained elusive.”
The rating agency said the performance of the highway now strongly suggested that traffic volumes on the expressway had been “significantly overestimated” and casts doubts on E22's ability to recover project costs in a manner consistent with the base case financial projections.
“Consequently, there is increasing uncertainty with respect to SDEB's ability to generate sufficient cash flow to service its debt and potential for a distressed restructuring of the rated sukuk prior to 2014,” MARC added.
MARC said it had also been informed by the issuer that it was in the midst of securing a funding commitment to refinance the sukuk and hopes to complete the refinancing by the end of the year.
The rating agency said the MARCWatch Negative placement also incorporated uncertainty over the resolution of legal risks posed by claims brought against SDEB for construction cost overruns by the expressway's contractor, Ranhill Engineers and Construction Sdn Bhd (REC), which is also a related entity of SDEB's main project sponsor.
“The financial impact of these claims could be potentially very high and pose a threat to SDEB's ability to continue as a going concern if the claims were to lead to a court judgement in favour of REC,” MARC noted.
REC has served a letter of demand on SDEB for payment of RM366.9mil for “construction cost overruns” arising from delays in land acquisition and finalising of the design of E22.
“MARC considers this development to be serious and unexpected,” the rating agency said.
MARC added that while SDEB had earlier provided for a part of these cost overruns in its financial year 2010 accounts, these were reversed in the subsequent financial year by SDEB.
“At present, MARC sees increased risk of winding-up proceedings being instituted against SDEB which could potentially prompt an acceleration of SDEB's senior obligations,” it said.