RAM Ratings has downgraded the respective ratings of MRCB Southern Link Berhad’s MYR 845 million Senior Sukuk and MYR 199 million Junior Sukuk to BB1 (from BBB3 previously) and B1 (from BB1 previously). Both ratings carry a negative outlook. MRCB Southern Link is a funding conduit for the construction-related costs of the 8.1-km Eastern Dispersal Link Expressway (EDL) in Johor Bahru (JB).
Since 1 August 2014, when tolling commenced on the EDL for vehicles crossing the JB-Singapore Causeway, daily traffic on the Expressway has been significantly lower than anticipated.
Owing to a combination of unexpected developments, the toll charge payable for cars (Class 1 vehicles) crossing the Causeway has surged from MYR 5.90 earlier this year to MYR 33 for a return trip as at 1 October 2014 (+460 per cent). This excludes the Vehicle Entry Permit fee imposed on foreign-registered cars by the Government of Singapore of SGD 35 per day (revised upwards from SGD 20 on 1 August 2014). The prohibitive costs of driving across the Causeway resulted in daily traffic for the first three months of tolling coming in at 45,341 vehicles, as compared to previous expectations of 61,000 vehicles for 2014.
The downward adjustment of the ratings is anchored on MRCB Southern Link’s weaker cash generation and the potential insufficiency of funds to repay the Senior and Junior Sukuk should traffic not recover, and the company not undertake a refinancing exercise in the near to medium term.
As an interim measure to stave off a liquidity crunch, MRCB SL is in the midst of procuring a bank guarantee of up to MYR 90 million, which is expected to replace current cash reserves in the company’s finance service reserve accounts (FSRAs). Upon the procurement of the guarantee facility, monies in the FSRAs will be available to repay near-term financial obligations of the company. While this addresses short-term liquidity concerns, we highlight that the company could potentially face a cash shortfall when the Junior and Senior Sukuk become due in December 2016 and December 2018, respectively. In this regard, the company plans to undertake a refinancing exercise by mid-2015. Future rating action will, therefore, hinge on the pace of completion of any refinancing exercise as well as the EDL’s traffic performance.
Originally published on www.cpifinancial.net