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Posted Date: November 18, 2020

MARC has downgraded MEX II Sdn Bhd's (MEX II) RM1.3 billion Sukuk Murabahah Programme rating to BBBIS from AIS, and its RM150.0 million Junior Bonds to BB from BBB. The ratings remain on MARCWatch Negative.

The ratings have been on MARCWatch Negative since May 2020 following insufficient progress with respect to MEX II's 16.8-km Lebuhraya Putrajaya-KLIA highway project (MEX Extension) since the ratings were downgraded in October 2019. The current downgrade on the Sukuk Murabahah reflects MARC's increased concerns on MEX II's timely ability to obtain additional financing to meet its debt service next year and complete a debt restructuring process. The three-notch downgrade on the Junior Bonds reflects MARC's notching policy on subordinated instruments in that rating band.

The rating agency observes that despite having sought and obtained an extension of time from Lembaga Lebuhraya Malaysia in June 2020 to complete MEX Extension by September 4, 2021, from July 4, 2020, the company has been unable to progress with the construction. MEX Extension has remained at about 86% complete as at July 2020. MEX II and main contractor cum parent Maju Holdings Sdn Bhd are currently looking to raise additional funding to complete construction of the project. There is a high execution risk that funding may not be available in a timely manner given the current challenging macro environment. This, and the fact that MEX II has principal amortisation and profit payment obligations to cover in 2021, creates significant pressure on liquidity. MEX II is due to pay RM68.7 million in April 2021 and RM38.2 million in October 2021.

MARC understands that the group is in the process of securing a bridge facility, which could raise sufficient funds to cover MEX II's financial obligations in 2021. Various strategies with respect to the sukuk are also currently being explored, including a refinancing exercise that may be subject to the government's consent. Given the market uncertainty and limited runway to the upcoming RM106.9 million sukuk obligations due in 2021, MARC has maintained the ratings on MARCWatch Negative. Absent any additional committed credit lines, MEX II's liquidity is only supported by around RM7.7 million in its Finance Service Reserve Account as at end-October 2020.

The MARCWatch Negative reflects the uncertainty over the company's ability to boost liquidity to repay near-term obligations and execute the refinancing plan in a timely manner. Inability to access additional funding to complete the project, leading to more scheduling delays, could further deepen MEX II's debt and liquidity issues. MARC may take a further negative rating action if there is a lack of progress in MEX II's refinancing plans by its next review in January/February 2021. Inability of MEX II to put in place the bridge facility by then, or adequately address the RM106.9 million sukuk obligations due next year, could drive a multi-notch downgrade. In the event of a debt restructure, MARC will re-assess MEX II and assign new ratings consistent with the rating agency's assessment of the company's capital structure, risk profile and prospects post-restructuring.

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

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