MARC Ratings has affirmed its AA-IS/Stable rating on Lebuhraya DUKE Fasa 3 Sdn Bhd’s (DUKE 3) RM3.64 billion Sukuk Wakalah. DUKE 3 is the concessionaire for the 32-km Setiawangsa-Pantai Expressway (SPE) under a concession that runs through August 5, 2069.
The rating continues to incorporate the adequately structured sukuk repayment profile that accommodates traffic ramp-up on SPE. The sukuk is fully amortising; annual debt service is back loaded with a gradual ramp-up from RM5.0 million (first principal repayment due on August 23, 2024) to RM440.0 million at maturity in 2039. This provides some headroom for DUKE 3 to build up traffic volume, generate cash and meet its financial obligations. The rating also considers SPE’s well-positioned alignment within mature catchment areas.
The project is practically complete with only minor work remaining. The company received its Certificate of Practical Completion on May 21, 2023, and inspections by Lembaga Lebuhraya Malaysia are currently underway. The concessionaire expects SPE to fully open by end-July 2023.
We note that one section of the highway (Section 4, Wangsa Maju toll plaza) has commenced tolling since March 1, 2022. In 2022, annual average daily traffic at the operating toll plaza reached 5,058 vehicles. This improved to 6,375 vehicles in the first four months of 2023. Traffic, however, remains significantly below its opening year forecast of 32,717 vehicles. We believe usage may improve once SPE is fully operational but would require a considerable ramp-up. Nevertheless, the company has no immediate liquidity pressure of significant debt maturing in the short to medium term. It has cash of RM259.6 million as of end-May 2023, to cover liquidity needs, including approximately RM94.0 million to complete SPE. DUKE 3’s cash position is further supported by RM90 million to be placed by project sponsor Ekovest Berhad into the Operating Revenue Account (ORA) upon project completion. At the same time, the 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 an irrevocable and unconditional bank guarantee – can be drawn down partly or fully when required.
MARC Ratings’ rating case assumes full tolling in October 2023 and a more conservative six-year traffic ramp-up from FY2025 to FY2030. We have also assumed repayments of the Reimbursable Interest Assistance (RIA) of RM560.0 million are deferred to after full settlement of the sukuk in FY2040 (the RIA is technically subordinated to the sukuk in terms of cash flow or payment priority), as well as a one-year deferment in toll compensation in lieu of toll hikes. Under the rating case, average and minimum finance service cover ratio (with cash and ORA) are projected at 2.1x and 1.5x (2034), meeting the covenanted 1.5x. In terms of financial flexibility, the current financing structure provides DUKE 3 with a 30-year tail period, providing room for a refinancing exercise, if required.