RAM Ratings assigned final AA2 rating to proposed RM1.35 billion sukuk by Bright Focus

13 January 2014

RAM Ratings has assigned a final rating of AA2/stable/- to Bright Focus Berhad's ("Bright Focus" or "the Group") proposed Islamic Securities of up to RM1.35 billion ("proposed Sukuk"). This rating update is in conjunction with amendments to the proposed Sukuk profit rates and its repayment profile. Any further changes to the final profit rates or the Sukuk's repayment profile will necessitate a reassessment of the Sukuk rating and correspondingly may result in a rating change.

Bright Focus owns 96.8% of Maju Expressway Sdn Bhd ("MESB" or "the Company") - the concessionaire of the 26-km Maju Expressway ("MEX" or "the Highway"). As the repayment of the proposed Sukuk relies solely on cashflow from MESB, the preliminary rating reflects the strong project economics and robust financial profile of the Company, supported by the covenants under the transaction structure.

The Highway offers a direct link between the commercial centre of Kuala Lumpur and Putrajaya and Cyberjaya. Since tolling commenced in 2008, the Highway's traffic volume has notched up a compounded annual growth rate of 20%, with average daily traffic at its 2 toll plazas reaching 100,000 vehicles in 2012.

Bright Focus is expected to demonstrate a robust debt-servicing aptitude, supported by sturdy dividends from MESB, which are in turn, backed by the Highway's steady traffic growth and the scheduled toll-rate increases under MESB's concession; its finance service cover ratio ("FSCR") is projected to come up to at least 2.25 times. As the projected FSCR is reliant on cash accumulation, we highlight that cash retention is imperative and it is to be prioritised ahead of any distributions to shareholders. Excessive distributions to its shareholder will be detrimental to the proposed Sukuk's rating.

RAM draws comfort from the proposed Sukuk's transaction terms, which impose restrictions on Bright Focus which includes no change in its MESB's shareholding, limitations on the assumption of additional debt as well as business activities on both Bright Focus and MESB. RAM has also received a written confirmation from MESB that there is no restriction on any financing to be obtained by Bright Focus under MESB's concession. We have also obtained a legal opinion that confirms the same.

The construction of a new 1.7-km Seri Kembangan interchange along the Highway is expected to boost MESB's earnings, via the establishment of a new toll plaza and the extension of its concession by up to 8 years. Although the new interchange will improve access and provide new catchment areas, the lower toll rate at the new Sri Kembangan toll plaza may cause traffic to shift away from the existing Putrajaya toll plaza.

Meanwhile, the proposed Sukuk's rating is moderated by construction risk in relation to the Seri Kembangan interchange, which is expected to be completed by early 2015 at a cost of RM112 million. While MESB has yet to appoint a contractor for these works, construction risk is considered less pronounced as most of the road will be at grade and is unlikely to affect the operation of the Highway. The Government has earmarked RM20 million for (ongoing) land acquisition, with about 20% of the required land comprising private lots while the rest is government-owned. Any cost in excess of this amount will be borne by MESB.

Notably, the Government had earlier deferred the construction of a 18-km section of the MEX leading to KLIA. In that respect, premised on the second feasibility report submitted by MESB to the Government in January 2013 and latest available information, RAM has been made to understand that the Spur Link is to be viewed as a separate project to be funded via additional debt as well as incremental cashflows from the introduction of potentially 2 new toll-plazas. Our present assessment has thus excluded the impact from the proposed extension; any deviation upon its materialisation is expected to be detrimental to the proposed Sukuk's rating. Transaction covenants under the Sukuk transaction, limits MESB's ability to undertake the construction of the Spur Link and/or to raise any indebtedness in relation to Spur Link, should such a scenario result in a rating downgrade of the Sukuk. Elsewhere, the terms provide for regular updates to RAM (and the Sukuk Trustee) with respect to developments on the Spur Link.

Based on representation to RAM, Hi-Summit Construction Sdn Bhd ("Hi-Summit" - the previous owner of the disputed 3.2%-stake in MESB currently held by Ulimas Sdn Bhd ("Ulimas") and its directors have been pursuing a lawsuit against Bright Focus, MESB and Ulimas since 2003. Although the lawsuit had been struck out by the High Court on 12 April 2011, Hi-Summit has subsequently submitted a new claim on 28 November 2012. The initial case is currently pending to be heard by the Federal Court (on 25 February 2014) and the potential claims liability of MESB and/or Bright Focus cannot be determined at this juncture should the court decide in favour of Hi-Summit. The transaction structure makes no provision for such a legal wrangle and as such, any claims liability that arises will have a negative impact on the rating.

Lastly, and similar to all other toll-road projects, the rating is moderated by inherent regulatory and single-project risks.

-Ends-

Media contact
Lee Chai Len
(603) 7628 1192
chailen@ram.com.my

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.

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