May 2011

A credit perspective on variations to parameters of toll-road concessions

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RAM Rating Services Berhad

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MAY 2011

A CREDIT PERSPECTIVE ON VARIATIONS TO PARAMETERS OF TOLL-ROAD CONCESSIONS

Analytical Contacts:

OVERVIEW The assessment of regulatory risk has always been essential in the ratings of tollroad concessionaires. This commentary examines the credit impact following recent announcements on toll-rate cuts, freezes on scheduled tariff increases, and the abolishment of toll collections for some concessionaires in RAM Ratings portfolio. A tolled road is formally conceptualised following the award and subsequent signing of the concession agreement (CA) between the Government and the concessionaire. The CA spells out details of the concession, including tariff schedules, compensation and termination terms. Given the vast outlay required and long gestation periods, the construction of tolled roads in Malaysia has been largely financed by the issuance of private debt securities (PDS). As project-financed entities, toll concessionaires have stringent restrictions that prohibit them from undertaking other business activities, apart from designing, constructing, operating and maintaining their respective tolled roads. In this regard, toll-road projects are generally ring-fenced and financed on a non-recourse basis. Since 1992, RAM Ratings has rated 59 debt issues from 17 toll-road concessionaires, with a combined value in excess of RM70 billion. Of these, more than RM27 billion of debt facilities under 12 toll concessionaires remain outstanding to date. RAM Ratings portfolio includes companies or concessionaires with matured tolled roads, such as Projek Lebuhraya Utara-Selatan Berhad (PLUS), New Pantai Expressway Sdn Bhd, Penang Bridge Sdn Bhd (PBSB), Expressway Lingkaran Tengah Sdn Bhd (ELITE), Kesas Sdn Bhd (KESAS) and
Published by :

Yean Ni Ven Manager Infrastructure & Utilities Ratings (603) 7628 1172 niven@ram.com.my Chong Van Nee Head Infrastructure & Utilities Ratings (603) 7628 1028 vannee@ram.com.my

RAM Rating Services Berhad

(763588-T)

Suite 20.01, Level 20 The Gardens South Tower Mid Valley City Lingkaran Syed Putra 59200 Kuala Lumpur

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+603 7628 1000 +603 2299 1000 +603 7620 8251 ramratings@ram.com.my www.ram.com.my

Lingkaran Trans Kota Sdn Bhd (Litrak); newer ones such as Projek Lintasan Shah Alam Sdn Bhd (PLSA); those with tolled roads that are still under construction, such as MRCB Southern Link Berhad (MRCB Southern Link); and holding companies as well as financing conduits such as Cerah Sama Sdn Bhd, PLUS SPV Berhad and Seafield Capital Berhad.

REGULATORY ENVIRONMENT TO DATE Toll-rate increases have been a recurrent predicament for all stakeholders involved due to their social and political implications. It is therefore not surprising that there have been instances when rate hikes have not received the green light from the authorities. Nonetheless, the Government has always compensated the concessionaires in such instances, as provided for under their CAs. The compensation has mostly been paid in cash, although there have been a few cases where it has taken the form of extensions to the concession periods and/or tax reprieves. For the toll concessionaires in RAM Ratings portfolio, the compensation packages - such as cash and/or tax reprieves - offered by the Government have been in line with the spirit of the relevant CAs. Table 1: Compensation packages of selected toll concessionaires
Concessionaire Projek Lebuhraya Utara-Selatan Berhad (PLUS) Remarks Overall reduction in toll rates vis-vis the tariff schedule. Overall reduction in toll-rate increases a 10% rise in tariffs every 3 years instead of the original 26%-33% hikes every 3-5 years. Types of compensation Extension of concession for a further 12 years to 31 May 2030 via a Supplemental Concession Agreement (SCA), inked on 8 July 1999. Pursuant to the Second Supplemental Concession Agreement dated 11 May 2002: Deduction of the notional tax on dividends that PLUS would declare and pay (if any) from the tax-exempt profits accumulated during the 5-year tax-exempt period (from 2002 to 2006). Deduction of all interest payable on the Government Support Loan (GSL). Offsetting of PLUSs income-tax liabilities payable to the Inland Revenue Board against such compensation due to the company. Waiver of any shared toll revenue payable to the Government against such compensation due to PLUS.

Abolishment of toll collection at the Senai toll plaza, effective 1 March 2004. Inclusion of the Seremban-Port

Pursuant to the Third Supplemental Concession Agreement signed on 22 April 2005: Extension of the concession term by 8 years and 7 months, i.e. ending on 31 December 2038.

Dickson Highway (SPDH) as part of the PLUS Expressways effective 7 October 2004. Additional Works involving road widening and the relocation of toll plazas. Prepayment of PLUSs RM750 million GSL and RM212 million Additional Government Support Loan (AGSL). Consequential amendments to the toll-compensation arrangement pursuant to the prepayment of the GSL and AGSL. No increase in toll rates after 2030. Deferment of 10% tariff increase that was supposed to have been effective on 1 January 2008 (except for the SPDH, the 2 ends of the North South Expressway at the Johor Causeway and the Bukit Kayu Hitam toll plaza). Overall reduction in tariff hikes (i.e. passenger cars were charged RM1.00 compared with the original RM1.50), which took effect in March 1999. Overall reduction in toll rate hikes (i.e. passenger cars were charged RM1.60 compared with the scheduled RM2.10). New Pantai Expressway Sdn Bhd Abolishment of the PJS 2 Kuala Lumpur-bound plaza. Cash compensation.

Lingkaran Trans Kota Sdn Bhd

Cash compensation pursuant to the Supplemental Agreement signed on 20 August 1999.

Cash compensation pursuant to the Second Supplemental Concession Agreement signed on 4 September 2007.

Cash compensation.

Toll-rate reduction at the PJS 2 toll plaza.

Cash compensation

REGULATORY ENVIRONMENT GOING FORWARD The idea of a sector-wide toll-rate restructuring has been in the offing for some time now. This idea appears to be finally crystallising, based on the recent 3

announcements of freezes on toll-rate hikes, tariff cuts and abolishment of toll collections with no compensation. On 15 October 2010, it was announced that toll rates would be frozen for 5 years, effective 1 January 2011, for 4 highways under PLUS Expressways Berhad (PEB). This was followed, in relatively quick succession, by a similar statement on the highways under MTD Capital Berhad (MTD Cap), i.e. the Kuala Lumpur-Karak Expressway (KLKE) and Phase 1 of the East Coast Expressway (ECE1).Meanwhile, tolling will be abolished for the East-West Link Expressway (EWLE) from May 2011. Both announcements had been made together with privatisation proposals. On 17 February 2011, the Government announced a tariff reduction for New Pantai Expressway Sdn Bhds (NPESB) Petaling Jaya Selatan 2 (PJS2) toll plaza, from RM1.60 to RM1.00 (for Class 1 vehicles, effective 18 February 2011). While it had been mentioned that the concessionaires for the KLKE, ECE1 and EWLE will not be receiving any form of concession extension or compensation in exchange, compensation details - if any - remain scant for the highways under PEB. For the PEB, privatisation would need to take into consideration the synchronisation of the terms of the various existing CAs under its stable. In the meantime, it has been announced that NPESB will receive an estimated RM90 million in cash compensation for the reduction of its toll rate. Apart from the above, we have also not discounted the possibility that other toll concessionaires have been approached with similar forms of restructuring, i.e. temporary freezes on tariff hikes or a lower quantum of increase, with no compensation. The recent announcements highlight variations to concession parameters that may affect the cashflow and debt-repayment ability of some toll concessionaires.

ABILITY TO WITHSTAND IMPACT - KEY TO PRESERVING CREDIT PROFILE We understand that the streamlining of the terms of the PEB Groups CAs will be followed by the restructuring of all its bonds and sukuk issues in order to match the Groups revised cash-generating aptitude to its debt-repayment profile. As for NPESB, the compensation of an estimated RM90 million is expected to restore the debt-coverage levels of both its Senior and Junior Notes. This is based on the assumption that the cash compensation will be retained by the company, as any distribution to its shareholders would erode the available cash pile for debt service. All said, any downward revision for toll rates without a corresponding cash compensation is a credit negative. Nevertheless, this does not necessarily mean 4

that there will be a rating change as each concessionaires credit profile is different, especially with regard to its cashflow and debt obligations. For example, a concessionaire may have sufficient cashflow and/or cash reserves in its financial structure to withstand such an impact, thus maintaining its debt-servicing ability. However, the reverse is also true; the more removed or subordinated a debt is from the source of cashflow, the more severe would be the likely impact. A commonly used quantitative measure of the strength of a projects debt-servicing ability is the debt service coverage ratio (DSCR) with cash balances, postdistribution. Analysis of RAM Ratings portfolio indicates that the majority of the rated toll concessionaires should be able to withstand some level of impact on their cashflow-generating aptitude without jeopardising their credit standing (refer to Table 2 for projected debt/finance coverage ratios before toll-rate revisions). Based on the announcements so far, there is no standard template for the toll-rate restructuring which, thus far, has been undertaken on a case-by-case basis through negotiations; these have account of the severity of the potential impact on each concessionaire and its stakeholders. We believe that any tariff restructuring involving toll concessionaires other than those mentioned thus far will take a similar route. Given that there is no one-size-fits-all approach, it is difficult to ascertain how it will eventually pan out at this juncture. As highlighted earlier, the degree of impact on each concessionaire will differ. In view of this, RAM Ratings will have to evaluate the specific toll concessionaire as events unfold and update the market accordingly.

Table 2: Projected debt/finance coverage ratios (debt/sukuk issued by toll concessionaires and toll-road-related entities)
Minimum debt / finance service coverage ratio (with cash balances, postdistribution) Average debt / finance service coverage ratio (with cash balances, postdistribution) Salient distribution covenant(s) Remarks

Issuer

Issue amount and type

Issue rating(s)/ outlook

Kesas Sdn Bhd

RM800 million Al-Bai Bithaman Ajil Islamic Debt Securities (2002/2014)

AA3 /Stable

2.13 times (excluding financial year ended 31 March 2014)

2.16 timesx

No payments on Redeemable Convertible Unsecured Loan Stocks, dividends or distributions to shareholders if: The financial service coverage ratio (FSCR) is less than 2.0 times, or would be less than 2.0 times following such payments or distributions. No distributions to shareholders unless: The FSCR is able to meet the covenanted 2.5 times after such payments. The issuer is able to maintain a debt-toequity (DE) ratio of not more than 70:30.

Shah Alam Expressway boasts commendable traffic-volume growth. Strong debt-coverage measures. Competition from other routes. Exposed to regulatory and single-project risks.

Konsortium Lebuhraya Butterworth-Kulim Sdn Bhd

RM247 million Secured Bai Bithaman Ajil Islamic Debt Securities (2005/2022)

AA3/Stable

2.50 times

3.51 times

Sustained traffic volume of the Butterworth-Kulim Expressway. Strong debt-servicing ability, supported by stringent covenants. Exposed to regulatory and single-project risks.

Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Lebuhraya Kajang-Seremban Sdn Bhd (LEKAS)

RM785 million Senior Sukuk Istisna (2007/2022) RM633 million Junior Sukuk Istisna (2007/2025) RM240 million Redeemable Convertible Unsecured Loan Stocks Programme (2007/2026) RM50 million Redeemable Unsecured Loan Stocks (2007/2027)

Senior Sukuk Istisna: BBB1 Junior Sukuk Istisna: BBB3 RULS: B3 RCULS: B3 /Negative (all ratings)

No distributions to shareholders unless: The FSCR is able to meet the covenanted 2.0 times following such payments. After the first principal payment on the Senior Sukuk Istisna. Not meaningful Not meaningful

Adequate debt-servicing ability during the ramp-up period until December 2013. Weaker-than-expected traffic performance and toll collections. Competition from other routes. Exposed to regulatory and single-project risks. The negative outlook reflects our concerns about LEKASs ability to meet its future debt obligations due to its poorerthan-expected cash-generating aptitude. The ratings will come under further downward pressure if the highways traffic volumes and toll collections remain subdued and/or efforts to restructure the debt securities do not progress in a timely manner.

Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Lingkaran Trans Kota Sdn Bhd

RM1.15 billion Sukuk Musyarakah Islamic MediumTerm Notes I Programme (2008/2023) RM300 million Sukuk Musyarakah Islamic MediumTerm Notes II Programme (2008/2023) RM100 million Islamic Commercial Papers Programme (2008/2015)

Sukuk Musharakah IMTN I: AA2 / Stable Sukuk Musharakah IMTN II: AA2/ Stable ICP: P1 2.12 times 3.04 timesx

No distributions to shareholders, or provide or repay any advances or loans to its shareholders, subsidiaries or association companies if: The Distribution FSCR is less than 2.00 times. The DE ratio is greater than 90:10.

Strong business profile underscored by the expressways strategic alignment and surrounding matured townships. Strong debt-servicing ability. Exposed to regulatory and single-project risks.

Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

MRCB Southern Link Berhad (funding vehicle for toll concessionaire MRCB Lingkaran Selatan Sdn Bhd)

RM845 million Secured Senior Sukuk (2008/2025) RM199 million Junior Sukuk (2008/2027)

Senior Sukuk: AA3/Stable Junior Sukuk: A2/Stable

1.33 times 1.06 time (subFSCR)

1.93 times 1.97 times (subFSCR)

No payments to Junior Sukuk holders if: The Senior FSCR (semiannual) falls below 2 times following such payments. The DE ratio of 80:20 is breached or if the ratio will be breached following such payments. No distributions to shareholders if: The Senior FSCR falls below 2 times (semiannual) or the Junior FSCR drops below 2.5 times following such payments. The DE ratio of 80:20 is breached or if the ratio will be breached following such payments. There are unpaid accumulated profit payments on the Junior Sukuk.

Favourable tolling concept encompasses all existing traffic entering and exiting Malaysia via the Johor-Singapore Causeway, which has been recording healthy volumes. Cashflow offers strong coverage on senior debts, adequate for junior obligations. Pre-completion risk of potential delays and cost overruns. Exposed to regulatory single-project risks. and

Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

New Pantai Expressway Sdn Bhd RM490 million Senior Bai Bithaman Ajil Notes (2003/2014) RM250 million Junior Bai Bithaman Ajil Notes (2003/2016)

No distributions if: The Senior FSCR (with cash balances, postdistribution) is less than 2 times.

Stable traffic-volume growth supported by established townships. Strong debt-servicing ability after the completion of a debtrestructuring exercise for the Senior Notes. Exposed to regulatory single-project risks. and

Senior Bai Bithaman: AA3/Stable Junior Bai Bithaman: AA3(s)/Stable 2.21 times 2.79 times

The enhanced rating of the Junior Notes reflects the strength of the corporate guarantee from IJM Corporation Berhad, pursuant to the Payment Guarantee that unconditionally and irrevocably guarantees the Junior Notes throughout the existence of the Senior Notes.

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Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Penang Bridge Sdn Bhd

RM785 million AlBai Bithaman Ajil Facility (2000/2013) RM695 million Redeemable Zero-Coupon Serial Sukuk Istisna (2006/2019)

No distributions if: The FSCR is less than 2.5 times after such distributions.

Resilient traffic flows supported by strategic position as the sole road link to Penang island. Strong debt-servicing ability. Potential traffic leakage Second Crossing. from and

AA2/Stable

1.77 times

2.90 times

Exposed to regulatory single-project risks.

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Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Projek Lebuhraya Utara-Selatan Berhad

RM3.55 billion Senior Sukuk (2007/2017) RM2.26 billion Sukuk Musharakah Series 1 (2006/2016)

No distributions if: The FSCR (with cash balances) is less than 2.25 times immediately after such payments.

Robust traffic flows along the North-South Expressway, the backbone of connectivity for Peninsular Malaysia. Strong cashflow. Low likelihood of competing routes. Exposed to regulatory and single-project risks.

RM2.41 billion Sukuk Musharakah Series 2 (2006/2019) RM4.5 billion Sukuk Musharakah MediumTerm Notes Programme (2006/2031)

AAA/Stable

2.47 times

3.01 times

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Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Projek Lintasan Shah Alam Sdn Bhd

RM330 million Sukuk Ijarah (2008/2027) RM415 million Sukuk Mudharabah (2008/2037)

No payments to the Junior Sukuk holders (applicable post-2025) and shareholders if: The FSCR falls below 1.7 times following such payments. The DE ratio of 55:45 is breached following such payments. Sukuk Ijarah: A1/Stable Sukuk Mudharabah: A3/Stable 2.15 times 1.55 times (subFSCR) 5.05 times 1.55 times (subFSCR) No distributions to shareholders if: The Senior Sukuk is still outstanding. The Junior Sukuks FSCR is less than 2 times following such payments. The DE ratio is more than 55:45 following such payments. There are unpaid cumulative profit payments on the Junior Sukuk.

Ready catchment area to drive near-term traffic growth on Lebuhraya Kemuning-Shah Alam; Alam Impian township expected to yield longer-term traffic potential. Stable debt-servicing ability; stringent covenants and favourable repayment profile. Exposed to regulatory and single-project risks.

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Issuer

Issue amount and type

Issue rating(s)/ outlook

Minimum debt / finance service coverage ratio (with cash balances, postdistribution)

Average debt / finance service coverage ratio (with cash balances, postdistribution)

Salient distribution covenant(s)

Remarks

Seafield Capital Berhad (funding vehicle for Expressway Lingkaran Tengah Sdn Bhd)

RM1.5 billion Sukuk Musharakah Programme (2009/2029)

No distributions to its shareholders if: Its FSCR is less than 2 times following such distributions. AA2/Stable 2.00 times 6.41 times

Steady traffic growth underscored by strategic alignment - primary link between the New Klang Valley Expressway, Kuala Lumpur International Airport and the North-South Expressway. Sukuk obligations amply covered by project cashflow. Susceptible to financial risks in terms of future debt. Exposed to regulatory and single-project risks.

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StandPoint Commentary

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