Senai-Desaru Expressway’s sukuk slapped with a downgrade by MARC

MARC has recently downgraded its ratings on Senai-Desaru Expressway’s (SDEB) MYR 1.89 billion nominal value Senior Sukuk Ijarah Medium Term Notes (Senior Sukuk) Programme and MYR 3.69 billion nominal value Junior Sukuk Ijarah Medium Term Notes (Junior Sukuk) Programme to BBIS and B-IS from BBB+IS and BBIS respectively.

“The outlook on the ratings remains negative,” said MARC in a public statement.

“The rating action reflects insufficient progress to date made by SDEB on restructuring its rated debt and further weakening of its liquidity position, which collectively suggest heightened risk of default by end-2014 in the event the restructuring is not completed by then.

“The traffic growth of SDEB’s sole toll concession asset, Senai-Pasir Gudang-Desaru Expressway (E22), has remained flat with daily traffic for the first five months of 2013 averaging 590,464 passenger car unit-kilometres (pcu-km) (2012: 587,163 pcu-km), which confiMYR s the rating agency’s view that spillover traffic into E22 from the congested Pasir Gudang Highway has yet to materialise.

In view of the high toll tariff differential between E22 and the North-South Expressway and slower-than-expected surrounding development projects, E22’s traffic performance is not expected to show significant improvement.

“Since MARC’s last rating action in February 2013, the legal action taken by the toll road contractor, Ranhill Engineers and Construction Sdn Bhd (REC), to recover construction cost overruns from SDEB continues to be unresolved.

While SDEB has refuted the claims amounting to MYR 366.9 million, any unfavourable development arising from this legal action could raise the prospect of a winding-up order and complicate refinancing efforts going forward.

“During the first nine months of the financial year ended June 2013, SDEB’s operating loss widened to MYR 27.7 million from MYR 17.3 million in 1HFY2013.

Taking into account SDEB’s current cash reserves of MYR 28.9 million as at March 31, 2013 and assuming no significant improvement in traffic and revenue levels over the next 12 months, MARC believes that the company will be challenged to remain current on its debt service by end-2014 based on an annual cash burn of MYR 10.0 million.

“The negative outlook reflects MARC’s view that without an improvement in traffic volumes, the company would continue to burn cash in the near term.

The rating agency continues to expect the company to pursue a restructuring of the rated debt to avoid a default.

The rating may be lowered further in the event of further delayed debt restructuring and/or a greater-than-expected deterioration in the company’s liquidity position.”

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