Posted Date: May 22, 2020

MARC has placed MEX II Sdn Bhd's ratings on MARCWatch Negative due to developments arising from the insufficient progress on the construction of the 16.8-km Lebuhraya Putrajaya-KLIA expressway (MEX Extension) to meet the project milestones since the ratings were downgraded last year. The delay has led to the concessionaire seeking another extension of time (EOT) to complete construction and concurrently restructure its RM1.3 billion Sukuk Murabahah and RM150.0 million Junior bonds in line with new milestones.

In October 2019, MARC downgraded the ratings on the Sukuk Murabahah and Junior bonds by two notches to AIS and BBB due to construction delay on MEX Extension and the ensuing weakening of finance servicing metrics that were no longer consistent with the previous ratings. As at end-April 2020, construction completion stood at 86%, only slightly increasing from 83% as at end-August 2019. The delay has been substantially contributed by stalled works at the critical Bridge 13 following a stop-work order issued by Jabatan Kerja Raya Sepang in April 2019 that remains in place. MEX II has appealed for the stop-work order to be lifted. However, the appeal is taking longer than anticipated partly due to the COVID-19 pandemic and the Movement Control Order.

MARC also understands that the application for the EOT to September 2021 has been submitted to Lembaga Lebuhraya Malaysia and is now under deliberation. This means that MEX Extension is expected to be completed 14 months later than the last EOT to July 2020 and two years behind the scheduled October 2019 completion date initially set by the authority. A restructuring/refinancing option that is currently being worked on appears to be in the early stages and contingent on obtaining the EOT. The company expects to finalise the restructuring within three months from the approval date of the EOT which is anticipated to be sometime before end-June 2020.

While MEX II faces uncertainty on the timing of its tolling operations, its cash in the designated accounts has reduced. As at end-April 2020, it has RM46.4 million available in the Finance Service Reserve Account that is sufficient to meet its next profit payment of RM38.9 million in October 2020. MEX II could face financial distress in 2021 as there are sukuk principal maturity payment of RM30 million and profit payments of RM77 million in that year if the restructuring/refinancing exercise fails to materialise or takes longer than expected to be finalised or if other measures are not put in place to shore up liquidity.

MARC will review the ratings placement and take the appropriate rating action when there is certainty on the timeline of the company's plans to complete construction of MEX Extension and undertake a restructuring/refinancing of the sukuk. Among the factors, the review will consider the analysis of new cash flow under the restructuring arrangement vis-à-vis the concessionaire's financial obligations. Conversely, the ratings could face multiple-notch downgrades on heightened default risk if the concessionaire is not able to execute its plans on a timely basis or if measures that are implemented deemed insufficient to address liquidity risk or if MEX II is unable to obtain an EOT.

Ati Affira Kholid, +603-2717 2941/ affira@marc.com.my;
Hafiza Abdul Rashid, +603-2717 2955/ hafiza@marc.com.my.

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