MARC Ratings has affirmed its ratings on Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd’s (Kesturi) RM2.3 billion Sukuk Musharakah (Senior Sukuk) and RM180 million Redeemable Secured Junior Bonds (Junior Bonds) at AA-IS and A-. The three-notch rating differential between the Senior Sukuk and Junior Bonds reflects the latter’s subordination to the Senior Sukuk in regard to security ranking and payment priority. The ratings outlook has been revised to stable from negative.
Kesturi operates two highways namely 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 concessionaire is 60%-owned by Ekovest Berhad via Nuzen Corporation Sdn Bhd while the remaining 40% is held by the Employees Provident Fund (EPF).
The affirmed ratings factor in the strong competitive position of Kesturi’s highways that have easy accessibility and wide connectivity to major roadways in the Klang Valley, as well as the long remaining life of the concession ending in August 2059, with an option to extend for another 10 years. For the nine months ending March 2022 (FY2022), the traffic volume came in higher than expected, recovering to above the FY2021 level and about 90% of the FY2020 level. We expect traffic volumes to normalise on the back of the receding impact of the COVID-19 pandemic and the country’s transitioning to the endemic phase.
The improvement in traffic volume has eased the pressure on the senior financial service cover ratio (FSCR) and is the basis of our outlook revision to stable. Under our sensitised case, Senior FSCR with cash is projected to improve to 1.8x in FY2023, above the covenanted 1.75x. The projection assumes full recovery in FY2023 to the FY2019 level, supplemented by receipts of the outstanding government compensation totalling RM115.8 million that would be received in FY2022 and FY2023. On a longer term, however, the highly leveraged capital structure and the sukuk’s step-up repayment arrangement would weigh on its liquidity position.
We note that Kesturi has adequate near-term liquidity. With projected operating cash flow of RM115 million for July–December 2022, we view liquidity to be sufficient to meet its Senior Sukuk’s financial obligations of RM171.8 million on December 2, 2022.