[RAM] RAM Ratings assigns final A2 rating to MEX Capital's RM1.126 bil Islamic MTN

RAM Ratings has assigned a final A2/Stable rating to MEX I Capital Berhad’s (MEX Capital or the Issuer) RM1.126 bil Islamic Medium-Term Notes (Islamic MTN or the Sukuk). In doing so, we have reviewed transaction documents relevant to the facility and find them to be in line with our expectations when the preliminary rating was assigned (published on 6 November 2020). 

RAM’s final rating also incorporates several updates, including the 14-month deferment of the Sukuk’s maturity schedule and the more recent pattern of traffic and recovery observed for Maju Expressway (MEX or the Highway) to date. It also considers the recent suspension of MEX II Sdn Bhd’s RM1.3 bil sukuk consequent to a missed payment event at the end of December 2021. 

The rating continues to be anchored by the Highway’s project economics as well as restrictions, limitations and covenants under the transaction. The favourable alignment of the 26-km MEX – the shortest direct link between Kuala Lumpur and Putrajaya, Cyberjaya and Kuala Lumpur International Airport – is also a rating positive. 

Traffic recovery observed in the advanced stages of the National Recovery Plan has been encouraging but we expect the recovery trajectory to stay uncertain, given the risk of new coronavirus variants emerging. This might put a dent in the Highway’s performance if lockdowns are reimposed and border re-openings are slower than expected in the near future. Future curbs are not however envisaged to be as severe as those seen under Movement Control Order 1.0 or 3.0. 

Besides pandemic-related pressure, our traffic projection also incorporates the potential impact from the impending completion of MRT Line 2 (Sungai Buloh-Putrajaya) and Sungai Besi Ulu Klang Expressway in 2022/2023, both of which run parallel to the Highway. We expect MEX’s average daily traffic to come up to 143,349 vehicles throughout the Sukuk’s tenure (base case: 183,690 vehicles). While the Sukuk’s transaction structure presently includes the provision of a toll collection agreement (TCA) to be signed by MEX II and MESB upon completion of the MEX II Highway. RAM’s sensitised assumptions accorded no cashflow benefit to the TCA.  

Under our stressed traffic assumptions, the annual cashflow of the Highway and projected cash accretion are anticipated to back MEX Capital’s steady debt servicing ability, translating into respective minimum and average projected finance service coverage ratios of 1.77 times and 2.30 times (with cash balances) over the tenure of the Sukuk (base case: 3.05 times and 7.30 times). 

The transaction’s inherent exposure to single-project and regulatory risks is, however, a moderating factor. The Highway has steep scheduled toll rate hikes ahead which may be deferred by the government. MESB will receive compensation payments (average of 40% of toll revenue) but may lose potential revenue as compensation is capped by the projected traffic volume stipulated in its concession agreement. The government will have no obligations to MEX Capital’s lenders in the event that MESB’s concession is terminated or expropriated. 

In this respect, we have taken note of the government’s agreement in principle in relation to the amendments to the RM550 mil Islamic Medium-Term Notes of Maju Expressway Sdn Bhd (MESB) – the concessionaire for the Highway, and source of repayment for the Sukuk – to facilitate the Sukuk issuance. While the agreement is subject to further discussion between MESB and the relevant authority, we note that any such discussions will involve bilateral negotiations between the two parties. RAM will reassess the potential rating impact, if and when such development on this front materialises.

We believe the transaction’s overall structure and terms imposed largely mitigates concerns about transaction governance and financial discipline going forward. These include a prohibition against additional debt and distributions to shareholders, limits on expenses, stringent oversight of designated accounts, and largely independent board representation. We have notched the Sukuk’s rating down by one-notch to account for past instances of poor financial management and weak governance. 

We highlight that the issuance of the RM1.126 bil sukuk will not include any cash proceeds and will be entirely used to refinance MEX Capital’s existing RM1.35 bil sukuk, the rating of which was last reaffirmed at C3/Negative on 19 March 2021. Any existing legal suits filed by the sukukholders in relation to MEX Capital’s past governance issues which led to refinancing are expected to be dropped after the successful refinancing of the existing RM1.35 bil Sukuk with restructured Sukuk. 

For further details on the assigned rating, please refer to our final rating rationale.

Analytical contacts
Yip Chee Meng
(603) 3385 2516
cmyip@ram.com.my

Davinder Kaur Gill
(603) 3385 2525
davinder@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. The credit rating also does not reflect the legality and enforceability of financial obligations.