MARC affirms its BBB-IS rating on Senai-Desaru Expressway Berhad’s (SDEB) RM1.89 billion Islamic Medium-Term Notes (Restructured Sukuk) Programme with a stable outlook. SDEB is the concessionaire of the 77-km tolled inter-urban Senai-Desaru Expressway (SDE) in Johor, which links the towns of Senai and Desaru with a connecting highway to Pasir Gudang.
The rating considers the accommodative amortisation schedule put in place under the programme. The back-ended financing structure – with the first principal repayment due in 2038 – and the step-up profit feature would provide some headroom for SDEB to build up sufficient cash, strengthen its liquidity position and maintain compliance with the covenanted Finance Service Cover Ratio (FSCR) of 1.25x. The rating is, however, constrained by the lack of catchment areas along key stretches of the SDE that limits traffic growth prospects and the heavy reliance on planned developments to spur traffic growth on the highway. The rating is also tempered by SDEB’s weak leverage metrics due to heavy financial costs and the resultant losses.
SDEB’s liquidity position is adequate at present, supported by RM71.8 million of cash and cash equivalents as at end-February 2020, sufficient to meet its profit/interest obligations totalling RM26.9 million in 2020 and RM27.9 million in 2021. Post COVID-19 quarantine effective March 18, 2020, there has been a general decline in traffic flow across highways in MARC’s rated universe. However, assuming a full recovery in 2021, our stressed scenario indicates that SDEB could withstand a decline in revenue of around 80% y-o-y in 2020 and maintain its FSCR at 1.25x for both 2020 and 2021. Of great importance, however, is SDEB’s ability to show solid top-line growth that requires a significant expansion in traffic volume and/or a firm increase in toll rates over the next 12 – 18 months. In the absence of both, SDEB would need to put in place measures to shore up its liquidity position. This is largely because of the higher financial obligations from 2022 onwards given the sukuk profit and principal step-up feature. Inability to demonstrate so will be a credit risk and will exert downward pressure on the rating and/or outlook.
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