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

Kesturi operates 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 affirmed rating on the Senior Sukuk incorporates the highways’ relatively strong competitive position with easy accessibility to a wide network of major roadways, their moderate cash flow generation ability and the long remaining life of the concessions.

However, Kesturi’s performance has been impacted by pandemic-related restrictions and shutdowns over the last two years, leading to a decline in traffic volumes. For financial year ended June 30, 2021 (FY2021), annual average daily traffic declined by 14.1% y-o-y to 144,643. Its Senior finance service cover ratio (FSCR) with cash is projected at 1.69x for FY2021. The revised outlook to negative factors in the downside risk to Kesturi’s ability to maintain the covenanted FSCR of 1.75x. We estimate that traffic volume will need to grow by 8%-10% from FY2019 levels to meet the covenanted FSCR in FY2022.

We note that with operating cash inflow of around RM220 million expected for FY2022, together with a cash balance of about RM151 million as of end-June 2021, Kesturi’s liquidity is sufficient to meet the Senior Sukuk’s principal repayment and profit payment of RM133 million on December 2, 2021, and profit payment of RM52 million on June 2, 2022. Sukukholders could call an event of default under the sukuk terms on the covenant breach. We will continue to monitor the pace of traffic recovery as well as Kesturi’s financial performance for our scheduled review by end-1Q2022. The ratings would be lowered in the absence of mitigating actions to shore up liquidity to remedy the covenant breach.

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