MARC has extended its MARCWatch Negative placement on MEX II Sdn Bhd’s RM1.3 billion Sukuk Murabahah Programme and RM150.0 million Junior Bonds. MARC had first placed the ratings on watch in May 2020 because of the company’s lack of sufficient progress with respect to its 16.8-km Lebuhraya Putrajaya-KLIA highway project (MEX Extension) and its inability to meet the project milestones since the ratings were downgraded in October 2019. The Sukuk Murabahah and Junior Bonds carried ratings of AIS and BBB prior to the MARCWatch Negative placement.
MEX II has obtained Lembaga Lebuhraya Malaysia’s approval in June 2020 to complete MEX Extension by September 4, 2021, an extension of time (EOT) from July 4, 2020 scheduled previously. However, progress is relatively unchanged from our last update in May, with completion still at about 86% as at end-July 2020. While the granting of the EOT is positive, the debt restructuring/refinancing exercise is still ongoing. In this regard, MARC understands that MEX II has entered into discussions with certain financial institutions. The details of a definitive financing plan are currently being finalised but expected to be firmed up in the next three months. MARC’s extension of the MARCWatch placement reflects the ongoing restructuring process. However, the MARCWatch Negative acknowledges substantial downside risks.
MARC will review the ratings placement and take the appropriate rating action when there is more clarity on the company’s debt restructuring plans. Among the factors that will be considered in the review is the analysis of new cash flow under the restructuring arrangement vis-à-vis the concessionaire’s financial obligations. Conversely, the ratings could face multiple-notch downgrades on heightened default risk if the restructuring plan fails to materialise or is significantly delayed, or if measures implemented are deemed insufficient to address liquidity risk.
For the short term, MEX II will be able to meet its next profit payment of RM38.9 million in October 2020 from the RM46.6 million it has available in the finance service reserve account as at end-June 2020. However, with a sukuk principal maturity payment of RM30.0 million and profit payments of RM77.0 million due in 2021, it could be facing financial difficulties by next year if the restructuring exercise is unsuccessful or its finalisation takes longer than expected, or if other measures are not in place to shore up liquidity.