RAM Ratings has lifted the Rating Watch (negative outlook) on Lebuhraya Kajang-Seremban Sdn Bhd's ("LEKAS" or "the Company") RM785 million Senior Sukuk Istisna' ("Senior Sukuk Istisna'"), RM633 million Junior Sukuk Istisna' ("Junior Sukuk Istisna'"), RM240 million Redeemable Convertible Unsecured Loan Stocks Programme ("RCULS") and RM50 million Redeemable Unsecured Loan Stocks ("RULS") (collectively known as "the debt securities"). Concurrently, the respective long-term ratings of the Senior and Junior Sukuk Istisna' have been downgraded to BBB1 and BBB3, respectively; while the long-term ratings of both the RCULS and RULS have been reaffirmed at B3. All the long-term ratings have a negative outlook:
LEKAS is the highway concessionaire for the 44-km Kajang-Seremban Highway ("the Highway") for 32 years and 6 months, until May 2039. The Highway was fully completed in early August 2010; full tolling operations commenced on 21 September 2010.
The rating downgrade for the Senior and Junior Sukuk Istisna' is premised on the Highway's substantially weaker-than-expected toll revenue and traffic performance. RAM Ratings had earlier anticipated around RM60 million of toll revenue in FYE 31 March 2011 ("FY Mar 2011"), from an average daily traffic ("ADT") of 65,000 vehicles; some 50% of this had been envisaged from long-distance travellers. In first 7 months of FY Mar 2011 (April to October 2010), however, toll collections only came up to RM15.62 million; with a corresponding ADT of 33,131 vehicles, with 7,074 vehicles or 21.35% from long-distance travel. Without any significant improvement in toll revenue and traffic flow in the immediate term, the Kajang-Seremban Highway is not expected to meet our projected numbers - a basis that the financing structure of the debt securities had been based on. Notably, the actual ADT has only reached around 21.5% of the 153,838 vehicles projected by traffic consultant Symonds Engineering Sdn Bhd for 2010.
We believe the weak performance is due to greater-than-anticipated resistance from users of competing routes, i.e. North-South Expressway ("NSE") and Federal Route 1 ("FR1"), to switch onto the Kajang-Seremban Highway. The deferment of the NSE's scheduled toll-rate hikes since 2008, which had resulted in relatively cheaper tariffs for this expressway, has also contributed to this situation. Moreover, developments and the pace of occupancy in areas along the Highway's alignment have remained subdued. Demand has therefore been lethargic for the faster but more expensive Kajang-Seremban Highway, compared to the toll-free FR1.
On that note, the BBB1 and BBB3 ratings of the Senior and Junior Sukuk Istisna' reflect LEKAS's adequate debt-servicing ability until December 2013. In view of the Company's poorer-than-expected cash-generating aptitude, however, we are concerned about its ability to meet the principal repayments on the Senior and Junior Sukuk Istisna', which will begin in June 2014 and June 2023, respectively. That said, the management has intimated that the debt securities will be restructured if the Highway's traffic volume and toll collections fail to improve significantly in the immediate term.
The 2-notch rating difference between the Junior Sukuk Istisna' and Senior Sukuk Istisna' is due to the former's subordination in terms of cashflow priority and security. The widening of the notches between the Senior and Junior Sukuk Istisna' reflects the weakened cashflow-protection metrics of the Junior Sukuk Istisna'.
The negative rating outlook, meanwhile, reflects our expectation that LEKAS's cashflow will weaken vis-à-vis its ability to meet its future debt obligations. The ratings will come under further downward pressure if the Highway's traffic volume and toll collections remain subdued and/or efforts to restructure the debt securities do not progress in a timely manner.
Media contact
Michael Ti
(603) 7628 1015
michael@ram.com.my
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© Press Release 2010
