The outlook revision is premised on the easing of the rating agency’s earlier concern that construction delay on the SPE project would negatively impact DUKE 3’s financial metrics. This concern has been sufficiently addressed by a liquidity support undertaking of up to RM274.5 million from the project sponsor, Ekovest Berhad. It will comprise RM184.5 million from the existing construction reserve account and an additional RM90 million that will be deposited into the operations reserve account upon project completion. This will be in the form of cash or an irrevocable and unconditional bank guarantee.

Meanwhile, the rating affirmation factors in the adequately structured sukuk repayment profile that provides some headroom for DUKE 3 to build up traffic volume and generate cash to meet its financial obligations. The rating also considers SPE’s well-positioned alignment within mature catchment areas as well as the limited construction cost-related risk cushioned by a fixed-priced contract with Ekovest. Moderating the rating are the slower-than-expected construction progress and traffic demand risk.

As at August 25, 2020, the overall progress of 70.8% trailed schedule by some 19%. Progress was largely hampered by the Movement Control Order that had essentially brought construction works to a near standstill for over three months from its implementation on March 18, 2020. The company had applied to Lembaga Lebuhraya Malaysia for an extension of time to complete the project, approval of which is expected to be received by end-November 2020. The extension sought is to March 2022, but DUKE 3 has an internal target to complete SPE and start tolling operations by July 2021. The company’s liquidity position is strong, supported by its cash and cash equivalents of approximately RM1.5 billion as at end-July 2020.

DUKE 3’s base case projects minimum and average finance service cover ratios (FSCR) at 2.4x and 3.0x throughout the sukuk’s tenure. Under MARC’s sensitised case, assuming a scenario of a six-month deferment in the start of tolling and a 10% cut to projected traffic volume, FSCR is expected to remain above the covenanted 1.5x. Incorporating a one-year deferment in the projected toll hikes, however, would result in an FSCR of 1.4x in FY2035 and 1.3x in FY2036.

MARC, nevertheless, notes that DUKE 3’s base case has assumed principal and interest payments on its Reimbursable Interest Assistance (RIA) totalling RM560.1 million over FY2024–FY2039. The RIA is subordinated to the sukuk and its repayment is subject to DUKE 3 meeting a minimum post-distribution FSCR of 2.0x. Deferring these payments to after sukuk maturity would result in a minimum and average FSCR of 1.9x and 2.5x.

The stable outlook reflects MARC’s expectation that DUKE 3 will remain in compliance with its financial covenants. Factors that could lead to a negative rating action include a weakening in the company’s financial or liquidity profile, or if there is a material change in the terms of the concession with adverse effects on DUKE 3’s business or financial profile. The rating/outlook could also be revised if there are adverse changes in the regulatory environment.

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