MARC has affirmed its BBB-_IS rating on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes Programme (Restructured Sukuk) and revised the outlook to negative from stable.

The rating affirmation is based on SDEB’s adequate near-term liquidity and the Restructured Sukuk’s accommodative back-ended amortisation structure with a step-up profit feature that provides some headroom for the company to build cash, improve its liquidity and meet the 1.25x covenanted finance service cover ratio. However, the COVID-19 pandemic has been testing SDEB’s volume resilience, and the negative outlook reflects the risk that traffic demand may not return to previous levels for an extended period of time, particularly in the leisure travel segment. This could lead to tighter liquidity conditions over the medium term.

Traffic fell 24% in 2020 while revenue declined by 13% y-o-y. Monthly traffic volume dropped 56.4% y-o-y during the movement control order (MCO) period between March and May 2020, recovering to pre-pandemic levels by August 2020 with the easing of restrictions but declining in 4Q2020 when the conditional MCO was imposed. As a consequence, SDEB’s key financial metrics came under immense pressure with cash from operations interest coverage dipping below 1.0x in fiscal 2020.

Current liquidity is supported by cash of RM55.3 million as at end-2020, adequate to cover RM27.9 million of profit payments due in 2021. However, liquidity will be tight by mid-2022 as approximately RM61.1 million of profit payments will come due in that year. As highlighted in our previous reports, strong traffic growth on Senai-Desaru Expressway and toll increases will be key to SDEB’s ability to meet its finance service obligations, although we see such prospects as slim at this juncture. The Restructured Sukuk continues to carry a refinancing element, and in that regard remains exposed to refinancing risk, although this could be partially mitigated by SDEB’s demonstrated record of capital market access.

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