MARC has affirmed its rating on toll concessionaire Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah at AA-IS with a stable outlook.
The rating incorporates the accommodative sukuk repayment profile that allows for sufficient time for traffic volume on DUKE 3’s 32-km Setiawangsa-Pantai Expressway (SPE) to build up and generate cash flow. The first principal repayment of RM5.0 million is due only in August 2024 while the gradual step-up feature under the back-ended financing structure provides headroom for the concessionaire. The rating also considers DUKE 3’s strong liquidity position that is supportive of financial service cover ratio (FSCR) that remains above the covenanted 1.5x.
Being constructed under a concession agreement (CA) with the Malaysian government ending August 5, 2069, SPE will connect Middle Ring Road 2 at Wangsa Maju to Kerinchi Link adjoining Federal Highway. Construction was 87.3% completed as of September 25, 2021, against the contracted October 31, 2021 completion date. We understand that the company has requested for an extension of time to March 2022 which is pending approval. DUKE 3, however, expects tolling to commence by January 2022, which is within our previous negative sensitivity of a six-month delay for the issuer. In this regard, the company will first open Section 4 (Setiawangsa–Taman Melati), which has been completed subject to the authority’s approval. Section 4 is expected to bring in about one-third of revenue upon SPE’s full operations.
Any impact on DUKE 3’s financial metrics from delay is expected to be cushioned by an additional RM90 million that project sponsor Ekovest Berhad will place in the Operating Revenue Account (ORA) upon completion of the project. At the same time, RM184.5 million currently in the Construction Reserve Account will also be transferred into the ORA. The total RM274.5 million in the ORA — in the form of irrevocable and unconditional bank guarantee — can be drawn down partly or fully when required to ensure the transaction FSCR, with cash balances is maintained above the covenanted 1.5x.
Meanwhile, we believe a fixed-priced, lump-sum turnkey engineering, procurement and construction contract with Ekovest will mitigate some of the risks associated with cost overruns. We understand, however, there are some design enhancements carried out outside the original scope of the contract, costing approximately RM417.2 million. This will be covered by Ekovest via injection of new equity of equivalent amount in the form of ordinary shares subscription, of which RM100 million has been placed on July 26, 2021.
Our assessment indicates no pressure on the company’s debt-servicing ability in the short to medium term given that it has RM776.7 million in cash and cash equivalents as at end-September 2021 to address liquidity risk. The current financing structure also provides DUKE 3 with a 31.5-year tail period, providing room for a refinancing exercise, if required.