Monday, October 24, 2011

MARC assigns AA to ANIH's RM2.5b debt notes

KUALA LUMPUR: Malaysian Rating Corp Bhd (MARC) has assigned a preliminary rating of AAIS with a stable outlook to ANIH Bhd's proposed RM2.5 billion senior sukuk musharakah programme.

ANIH was set up to acquire toll road concessions -- currently owned by MTD Prime Sdn Bhd (MTD Prime) and Metramac Corporation Sdn Bhd (Metramac) -- with the use of proceeds from the RM2.5 billion rated Sukuk Programme and RM620 million unrated junior bonds, in addition to RM525 million of contributed equity.

MARC said on Monday, Oct 25 the concession assets to be acquired are the Kuala Lumpur-Karak Highway (KL-Karak), Phase 1 of the East Coast Expressway (ECE1), the East-West Link (EWL) and the KL-Seremban Expressway.

The acquisition is a related party transaction; the two owners of ANIH are the current executive chairman and chief executive officer of MTD CAPITAL BHD [] (MTD Capital) who are also substantial shareholders of the ultimate holding company of MTD Prime and Metramac.

ANIH will service the rated debt and other indebtedness principally through revenues generated from the collection of tolls on KL-Karak, ECE1 and to a much lesser extent, KL-Seremban.

'The AAIS rating reflects the mature nature of the toll road concessions to be acquired, particularly the solid track record of toll traffic on KL-Karak and ECE1, and operating history of the toll roads.

The rating also takes into account adequate projected cash flow coverage metrics for the rating level, based on anticipated traffic compound annual growth rates (CAGRs) of 2.79% and 4.63% for KL-Karak and ECE1 respectively from 2012 through 2030 and two scheduled toll hikes during the tenure of the Sukuk Programme. Modest earnings and cash flow contributions from the KL-Seremban Expressway are projected until the expiry of the concession in 2018,' it said.

Independent traffic projections by Halcrow Consultants Sdn Bhd underpinning the base case financial forecast appear reasonable based on KL-Karak's and ECE1's four-year historical CAGRs of 5.58% and 13.69% respectively.

Both roads attract substantial traffic in spite of the existence of other alternatives and are expected to remain as the main link between Malaysia's east and west coast.

The assigned rating also reflects the senior secured status of the Sukuk Programme and its position in ANIH's capital structure and the deeply subordinated junior bonds. Payment of coupons on the junior bonds is subject to the maintenance of the FSCR of the Sukuk Programme above 2.50 times. The junior bonds are repayable in 2031 and 2032, after the last tranche of the Sukuk Programme has been repaid.

Separately, MARC expects governance obligations put in place by the Sukuk Programme's covenant package to mitigate financial risks arising from the significant level of related-party transactions that will be undertaken at ANIH with respect to toll collection operations and maintenance of the toll roads.

Key risks include sensitivity of projected cash flow coverage metrics to an underperformance of toll projections for KL-Karak and ECE1 and dependence on scheduled toll increases to maintain finance service coverage commensurate with the rating level.

Under the base case scenario, ANIH's finance service coverage ratios (FSCRs) on the Sukuk Programme averages 3.02 times with a minimum coverage level of 1.99 times incorporating retained cash. At these levels, it is apparent that ANIH's ability to service the sukuk would be severely diminished if the scheduled toll increases in January 2015 and January 2020 are scaled back or delayed.

Reflecting ANIH's fairly leveraged capital structure, MARC's sensitivity analyses indicate a fairly low degree of resilience under downside scenarios with respect to FSCR levels for the Sukuk Programme. Annual repayment obligations on the Sukuk Programme increase significantly from RM50 million in 2015 to RM150 million in 2021 before levelling off at RM230 million in 2029.

ANIH is projecting pre-tax losses for three consecutive financial years. The losses in FY2013 through FY2015 will be due in large part to the freeze in toll hikes for the KL-Karak, ECE1 and KL-Seremban Expressway until January 2015 and amortisation charges in respect of the toll road concessions.

ANIH does not expect to pay taxes on its income during the tenure of the Sukuk Programme based on its projected financial performance and agreed tax exemptions granted by the government in lieu of cash compensation for the aforementioned freeze on toll rate hikes for the three highways and early termination of the EWL concession.

The stable outlook reflects MARC's expectations that the toll road concessions will continue to generate stable cash flows in the near- to intermediate-term to service the sukuk.

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