RAM Ratings Reaffirms Rating of MRCB Southern Link's Senior Sukuk, Maintains Negative Outlook

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1. IB Press Release Service Published on :​ ​IslamicBanker.com Publications: ​https://www.islamicmarkets.com/publications RAM Ratings Reaffirms Rating of MRCB Southern Link's Senior Sukuk, Maintains Negative Outlook 13 July 2017 RAM Ratings has reaffirmed the rating of MRCB Southern Link Berhad's (MRCB Southern Link or the Company)'s RM845 million Senior Sukuk at BB3/negative. The rating reflects the continued low safety of payment of MRCB Southern Link's financial obligations. Given the persistent mismatch between MRCB Southern Link's annual cash generation and annual debt repayment owing to the lower than expected traffic volume of the 8.62-km Eastern Dispersal Link (EDL or the Expressway), the Company continues to rely on shareholder support to repay its dues. Its parent company, Malaysian Resources Corporation Berhad (MRCB), has over the last 2 years injected RM58 million into the Company and on 21 June 2017 injected an additional RM67 million to fully repay the Company's term loan lenders. The negative outlook on the rating, meanwhile, is premised on our concerns over the cash shortfall that the Company is expected to face in repaying its dues in June 2018, which coincides with the commencement of principal repayments of the Senior Sukuk. In this regard, in the absence of a cash infusion from MRCB, the Company is anticipated, in the interim, to utilise its Finance Service Reserve Account bank guarantee facility (FSRA BG) of RM59.35 million to avert any potential default under the Senior Sukuk until June 2019. We expect to downgrade the Senior Sukuk rating over the next 12-18 months should there be concerns over heightened default risk and a strained liquidity position owing to further deterioration in traffic or an absence of financial support from MRCB. Lower-than-envisaged traffic volumes since the commencement of tolling in August 2014 have undermined the projected toll revenue of the concessionaire, MRCB Lingkaran Selatan Sdn Bhd. Average daily traffic (ADT) on the Expressway came in marginally lower at 42,026 vehicles in FY Dec 2016 (RAM's expectation: 42,631 vehicles). ADT declined a further 6.6% to 39,264 vehicles in 5M FY Dec 2017 and is anticipated to drop 10% in 2017 in view of the introduction of the Malaysian Road Charge on 1 November 2016 (RM20) and the Singapore Reciprocal Road Charge on 15 February 2017 (SG$6.40), payable for all foreign-registered vehicles entering both countries through the Causeway and the Second Link. While we do not expect any toll rate hike in 2018, we have assumed that there will be no growth in the EDL's ADT. Thereafter, our sensitivity analysis has factored in the impact of an expected tariff increase in 2019 which would lead to a further 3% reduction in ADT.
2. IB Press Release Service Published on :​ ​IslamicBanker.com Publications: ​https://www.islamicmarkets.com/publications MRCB Southern Link is a funding conduit for the EDL. The Company's financial commitments will be supported by back-to-back payments from MRCB Lingkaran Selatan. Recognising the strong credit link between the 2 entities, we view them in aggregate from a credit standpoint. Organisation Name: News Type: RAM Rating Services Berhad RATING ANNOUNCEMENT Source: BNM Announcements Media Contact Padthma Subbiah (603) 7628 1162 padthma@ram.com.my Disclaimer: The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security's market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations. RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings' credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. Similarly, the disclaimers above also apply to RAM Ratings' credit-related analyses and commentaries, where relevant.