MARC has affirmed its AA-_IS and A- ratings on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) RM2.3 billion Sukuk Musharakah (Senior Sukuk) and RM180 million Redeemable Secured Junior Bonds (Junior Bonds). The three-notch rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordination to the Senior Sukuk with regard to security ranking and payment priority. The ratings outlook is stable.

Kesturi operates two highways, the 18-km DUKE Phase 1 linking eastern and western Kuala Lumpur, and DUKE Phase 2 that comprises two elevated carriageway links, namely the 9-km Tun Razak Link and the 7-km Sri Damansara Link.

The Senior Sukuk rating is supported by MARC’s view of the highways’ relatively strong competitive position with easy accessibility to a wide network of major roadways as well as the company’s amortising debt structure and resilient, albeit softening, debt metrics. Kesturi’s liquidity position is expected to be as comfortable throughout FY June 2021 which would mitigate a potential short-term revenue shortfall from the impact of COVID-19. The estimated cash of around RM182 million as at end-June 2020 and an operating cash flow projected at around RM157 million for FY2021 (MARC’s sensitised case), should cover the upcoming sukuk principal repayment of RM50 million in December 2020 and semi-annual profit payments totalling RM108 million payable in June and December 2021.

COVID-19 and related government containment measures including the Movement Control Order (MCO) have hit Kesturi’s traffic numbers quite heavily, particularly in the peak lockdown months of April and May 2020. Average daily traffic (ADT) was down 51% in the four months following implementation of the MCO (i.e. March – June 2020) from the level eight months prior (i.e. July 2019 – February 2020). This has led to an almost 13% decline in annual ADT in FY2020.

As movement restrictions gradually eased, traffic has recovered, rising sharply in June 2020 compared to April, although 24% below the level in June 2019. Given the current decline in traffic volumes, and in view that the COVID-19 situation can still evolve as economic activities and government restrictions respond to ongoing developments, MARC has assumed traffic volumes to contract 20% in FY2021 and full recovery to 2019 volumes only in 2022 in its sensitised cash flow. The rating agency has also assumed a three-year delay in toll hikes from their scheduled dates as provided in the concession agreements, as well as a one-year delay in the receipt of related government compensation. The sensitised case indicates an average Senior financial service cover ratio (FSCR) of 1.9x over the next three years, above the covenanted 1.75x. The FSCR could ease to below 1.75x between FY2025 and FY2027, before increasing to about 1.8x in FY2028, supported by toll rate increases.

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