RAM lowers ratings of MRCB Southern Link sukuk

PETALING JAYA: RAM Ratings has downgraded the ratings of MRCB’s (Malaysian Resources Corporation Bhd) unit, MRCB Southern Link Bhd’s RM845 million senior sukuk and RM199 million junior sukuk, to BB3 from BB1 and C3 from B1 respectively.
“Both ratings have a negative outlook,” RAM said in a staement yesterday.
MRCB Southern Link is a funding conduit for the construction-related costs of the 8.62km Eastern Dispersal Link Expressway (EDL) in Johor Baru.
“The rating downgrade is premised on the company’s tightening liquidity, a result of the widening mismatch between its cashflow-generating ability and the annual repayments on its sukuk, and the delay in its proposed refinancing plans.
“Moreover, the rating downgrade for the junior sukuk is also due to the heightened likelihood of a deferment on its profit payments falling due on Dec 23,” it said.
Given its subdued traffic volume and higher-than-expected capital and operational expenditures, RAM expects MRCB Southern Link’s pre-financing cashflow to come in at only RM91.39 million in fiscal year 2015.
“We highlight that this is below our expectation of RM96.31 million and also MRCB’s base-case projection of RM106.42 million. The company’s lower internally generated funds coupled with the RM8 million cash that was injected into the company by its parent MRCB to help allay the prospect of cash insufficiency, has resulted in MRCB Southern Link’s cash pile to only sum up to RM57.91 million as at Dec 1, which is insufficient to cover RM66.5 million of cumulative dues over the next month, i.e. RM30.7 million under its Senior Sukuk (due on Dec 23), RM25.6 million under its term loan facility (due on 4 January 2016) and RM10.2 million under its Junior Sukuk (due on Dec 23),” it said.
RAM viewed that MRCB Southern Link is proposing to defer its junior sukuk profit payment falling due on Dec 23, by a month or alternatively MRCB is expected to infuse additional cash into the company.
It said that MRCB Southern Link’s deferment of profit payments on the junior sukuk would be tantamount to a missed payment on the instrument, even though the terms of the junior sukuk allow the company to do so.
RAM also expects MRCB Southern Link to still experience a cash shortfall when repaying its term loan on Jan 4, 2018 since it had previously projected the company to default on its debt obligations on June 23, 2019.
“Any default under the term loan will result in a cross-default on the senior sukuk as they rank pari passu in terms of cashflow and security. Thus, the negative rating outlook on the senior sukuk signals its continued susceptibility to further rating pressure amid its weakening liquidity position, should there be further delays in its refinancing exercise,” it said.
Meanwhile, RAM noted that MRCB Southern Link will be going ahead with its refinancing plan.
“The hold-up in completing the refinancing exercise by end-2015 has led to a change in the targeted completion date, to end-March 2016.
“Given that the company’s refinancing plans have yet to near its conclusion, we do not preclude further delays beyond the targeted timeline of Q1’2016,” it added.