RATING APPROACH FOR TOLL ROADS PROJECT FINANCING RATING APPROACH FOR TOLL ROADS PROJECT FINANCING

MALAYSIAN RATING CORPORATION BERHAD
Company No.: 364803 V

RATING APPROACH FOR TOLL ROADS PROJECT FINANCING

Contact: Sandeep Bhattacharya Vice President, Ratings sandeep@marc.com.my +603 2092 5398 www.marc.com.my

Page 1 of 17

operate. consisting of two lanes in each direction with either limited or partial accessibility. Expressways in Malaysia are defined as high speed routes with at least four lanes. To improve traffic flows and dispersal in major cities. from the East towards Kuantan. The ratings of these facilities range from AA. MARC rates a number of toll road debts/ finance facilities of several issuers. Most expressways in Malaysia are limited access expressways.000 km in length from North to the border of Thailand.to BB-. Negeri Sembilan. from South to the Causeway and Second Link to Singapore. All of Malaysia’s toll roads are managed under the build. Road projects which can be implemented under the privatization programme will also be identified. The Malaysian expressway system which started with the North-South Expressway is expanding substantially. Malaysia has extensive toll roads. several urban roads will be constructed or upgraded. Most of the toll roads are in major cities and surburban areas such as Klang Valley. Pulau Pinang. standards. and Johor Bahru. semi-matured and matured toll roads.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING INTRODUCTION Toll road is defined as a road on which a toll authority collects a fee for use. a study will be undertaken to identify the required road networks. from West to Klang and Pulau Indah and. including the construction of ring roads and bypasses in Georgetown. transfer (BOT) basis. There are also toll bridges and toll tunnels. Page 2 of 17 . Under the Ninth Malaysia Plan (2006-2010). Johor Bahru and Penang. Seremban. MARC-rated toll roads comprise of pre-operational toll roads. Malaysian expressways span more than 1. To expedite development of Sabah and Sarawak. built by private corporations under the supervision of the government highway authority. the Highway Network Development Plan (HNDP) review which is expected to be completed in 2006. will identify priority projects to improve the national road network in Peninsular Malaysia. management and usages of expressways in the country are subject to Federal Roads Act (Private Management) 1984. and MARC-1 to MARC-2. Johor. The construction. which form the majority of the expressways in the country.

Successful experience in building and operating toll roads would be positive rating factors. Pre-operational toll roads are exposed to precompletion or construction risk namely cost overrun. Ratings for project financing of toll roads encompass a multiplicity of factors which are listed below: Project Sponsors/Management Principal Project Agreements o Concession Agreement and other pertinent project documents o Shareholders’ agreement o Turnkey contract agreement Construction Risk Analysis Operational Risk Analysis Market Risk o Independent traffic study o Traffic forecast – volume and revenue o Toll-rate setting mechanism o Demographic and key drivers of traffic growth analysis Issue Structure Analysis Financial Risk Analysis o Project Costs o Earnings and Cashflow . An assessment of the key management personnel including qualification. financial data and other corporate information of project sponsors will form the basis of evaluation for the following risk factors: The project sponsor’s background. which are estimates and most of the time. skills and experience shall also be carried out.e.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING ANALYTICAL FRAMEWORK The rating approaches as for pre-operational toll roads and operational toll roads have some similarities and differences. Page 3 of 17 . MARC’s analyst also has to rely on the independent traffic study report for projections of traffic volume and revenues.Actual and Projections o Capital Structure and Financial Flexibility PROJECT SPONSORS/MANAGEMENT Documents related to ownership structure (i. are less than accurate. articles of incorporation and shareholders’ agreement). delay risk. track record The project sponsor’s previous involvement with toll road projects that have been built and operated successfully will be evaluated. etc.

in the event that the construction of the toll road is delayed by one year from the stipulated time of completion due to the fault of KLT. the sole shareholder of SPRINT provided an undertaking to subscribe to loan stocks issued by SPRINT of up to a maximum of RM410 million. particularly in conjunction with the ability to increase toll rates by the agreed quantum and time frame. The strategic importance of the project to the sponsor is also considered. the concession agreement is the first document that shall be rigorously reviewed. toll road concession in Malaysia is based on build. whereby the concessionaire is responsible to construct and operate the toll road on its own or to contract out the toll revenue collections. the toll road including the rights to collect toll shall be Page 4 of 17 . The extraction of salient points within the agreement that would have bearing on the rating shall be scrutinized. PRINCIPAL PROJECT AGREEMENTS All of the toll road concessions currently rated by MARC are awarded by the Government of Malaysia (GOM). If the sponsors have significant resources and time already invested in the project. to provide liquidity support and to maintain a material interest in the project during the life of the financing facilities. SPRINT’s rating was reaffirmed at AA. For example. In the case of Konsortium Lapangan Terjaya (KLT). which include: o Type of Concession Normally. The CA also serves as a basis for an evaluation of regulatory risk. rights and responsibilities of both parties entering into the agreement. as well as compensation to the concessionaires if there is an adverse amendment to the CA. Commitment Evidence of the sponsor’s commitment to the project will be looked at. contingent equity requirements. LITRAK Berhad and Kumpulan Perangsang Berhad which afford the project some degree of financial flexibility. operate and transfer (BOT). in particular. SPRINT also has a strong set of shareholders namely Gamuda. and/or carry out the maintenance of the toll road during the concession period. The Concession Agreement amongst others spells out the job scope. Maju Holdings (the ultimate shareholder) undertakes to cover any shortfall to fulfill profit payments due within the delayed period. Higher levels of equity investments on the part of the sponsors are considered a positive factor when evaluating a project. SPRINT Holdings. Examples of commitment may be in the form of undertaking to cover cost overruns. they are less likely to abandon it. demonstrating the commitment of the project sponsor. Thus. The audited accounts of the sponsors for the past three to five years will form the basis of this assessment. These concessions are governed by concession agreements (CA) entered into between the concessionaire and the government.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Financial strength The financial strength of the project sponsors is assessed. At the end of the concession period. The credit quality of the sponsors is important to ensure that they will be able to meet any future obligations.in 2005.

the highest rated toll road which was upgraded one notch to AA in 2005. The concession period can usually be extended under certain circumstances. partly as a result of this minimum traffic growth guarantee. if the government terminates o o o Page 5 of 17 . the concessionaire will be compensated by the government. the timeliness of such support would also be an important consideration. The question that needs to be addressed is how the CA protects the bondholders as a result of terminations. This form of support is evident in MTD Prime Sdn Bhd. The strategic importance of particular toll roads to the holistic development of infrastructure in Malaysia to support economic growth shall be looked at. For example. MTD Prime also exhibits the most favourable score for market risk segment. the concessionaire will share an agreed percentage of the excess with the government if the actual traffic volume exceeded an agreed growth rate (the first threshold toll income). In the case of most of the toll roads rated by MARC. such as in the event that the concessionaire has to carry out required additional works on the infrastructure of the toll roads. roles and responsibilities of both parties under the concessions would have to be examined. o Concession period The duration of the concession agreement is normally long term (20 to 30 years) as toll roads have relatively long gestation period before the shareholders would realize any return on the investments. Compensation in the event toll rates revision does not materialize or below the projected toll rates and sharing of excess toll revenue Other form of support includes minimum traffic growth guaranteed by the government.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING transferred back to the government. Nevertheless. The rights. termed as the Support Traffic Volume (STV). Provision for termination and the compensation for termination for both parties This is a normal provision in a concession agreement like any other similar agreements. The analyst shall look at the events of defaults. force majeure (events that are beyond the company’s control) terms and conditions relating to termination as well as the subsequent compensation. In return for the traffic guarantee. If the actual traffic volume falls below the STV. SPRINT was given government support loans of up to RM390 million and it has also obtained the government’s approval to defer the repayments of some of these loans. The rationale is that government’s involvement may mitigate the non-completion or delay risk of certain projects. Availability and form of government support Clause indicating strong government support is a positive rating factor. to match the toll revenue expectation.

However. MARC’s analyst shall assess the impact of the extended concession period and the lower toll rates on the project’s cash flow projections and the consequent ability to service debt obligations during the bond tenure. delay risk. MARC shall consider factors such as the appointed contractors. For both cases. Page 6 of 17 . Thus this fact would also need to be factored into MARC’s sensitivity analyses. the construction period during which the contractor is responsible to design. o CONSTRUCTION RISK ANALYSIS Two toll roads rated by MARC are still under construction and expected to be completed and fully operational in 2008. A thing to note though is that the increase in toll rates may have a negative impact on traffic volume for a period of timeafter the increase. as part of the compensation package provided by the government due to expected loss of earnings for the remainder of the period resulting from lower revised toll rates as compared to the agreed toll rates as per CA. projected costs. and outlines the scope of work. it can be expected that the approval process would be somewhat time consuming.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING the concession. complete and commission the highway as well as the turnkey contract price. within the scheduled budget and up to the required performance standards. the government must pay the financiers within six months of termination the aggregate amount owing to the financiers at the date of payment. operation and maintenance risk and other terms of the construction contract. in arriving at the overall ratings for the projects. Turnkey Contract Agreement The turnkey contract agreement governs the contractual relationship between the concessionaire and the turnkey contractor. o Conditions for extension of concession period There are instances where the concession period is extended. construct. Construction risk is the risk that the toll road project is not completed on time. the government’s liability to lenders is usually subject to a certain limit. rights and responsibilities. construction risk is given a risk weightage of 20%. In reviewing these risks. The effect on revenue would thus need to be factored as part of MARC’s sensitivity analyses. Toll rate setting mechanism and its enforceability Provisions in respect of the toll rate setting mechanism will need to be studied by MARC’s analyst. Given the public sensitivity of any toll rate revision. KLT and Konsortium Lebuhraya Utara – Timur (KL) Sdn Bhd (Kesturi) are both rated at A+. MTD Prime is one example where the concession period was extended for five more years. A lump sum fixed price contract would be favourable to the concessionaire as the first layer of protection against cost overrun arising from any unexpected increase in variable contract costing above the budgeted cost.

RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Design-build or other contracts Contracts are normally on the basis of ‘design. the contractor may have to pay liquidated ascertained damages payment (LAD) computed on a daily basis. Apart from the LAD. The turnkey contractor has the responsibility to effect and maintain. Basically. the bonus incentive equals to 50% of the Net Toll Revenue attributable to the section of work for the period between the scheduled completion date and the actual early completion date. and the period covered by the guarantee. Performance bonds. insurance policies and liquidated damages. as well as extension of time In the event of failure to complete by the specified date. Variation order and additional work processes The analyst shall examine the circumstances which warrant the contractor to be compensated if there are additional works requested by the government or necessitated by the contractor’s default or variation arising from amendments to the approved design. as these risks have been passed to the turnkey contractor through the back-to-back liquidated ascertained damages arrangement in the turnkey contract. workmen’s compensation and third party liability insurance. the maximum amount allowed under the contract is normally 5% of the turnkey contract price. The MARC’s analyst shall assess the track record and experience of the consultant in related projects and whether the contractor has given a performance guarantee for the design. MARC shall examine the requirement for the contractor to deposit a Performance Bond equivalent to 5% of the Contract Sum. the turnkey contract shall ensure that the concessionaire is protected against any cost overrun and delay risk. The analyst shall ensure that there are cash reserves and credit lines available to cover instances of cost overruns/delays. construction works are insured against any loss or damage during the construction period up to the end of the defects liability period. For example. There are instances where the turnkey contract also provides for an early completion incentive to the turnkey contractor if any section of the works is completed before the date of completion for the works. The performance bond is usually assignable to the government for the contractor’s due obligations to perform under the CA during the construction period as well as during the defect liability period specified under the contract. Page 7 of 17 . build. Extension of time and early completion MARC’s analyst shall also look at the provision for an extension of time and when the LAD shall be effective in the event of any delays. the contractor’s all risks insurance policy. in KLT’s case. guarantees. amongst others. operate and maintain’ where the concessionaire appoints an independent consultant to undertake the detailed design. Similar to other projects of this nature.

the land shall be free of encumbrances to enable the concessionaire to proceed with the construction works. while a fixed-price contract may protect against cost overruns. Other considerations MARC’s analyst shall need to know the contractor’s plan for acquiring sufficient equipment. scheduled time frame. MARC shall monitor the construction progress of the toll road by examining the construction progress report prepared by an engineering consultant. The existence of early completion incentives. damages or overruns. requirement for land acquisitions The question to be addressed here is which party will be or is responsible for making available to the concessionaire the land required in relation to the concession area and costs involved in the land acquisition. Another question is which party will bear the costs for the removal and resettling of squatters or occupiers and the compensation for each squatter family. with respect to strikes and labour laws/rules that could affect the project and any dispute settlement/resolution process with contractors and subcontractors. Major contractors MARC shall evaluate the experience and track record of the major contractors in related toll road projects and their financial profile. when the construction shall begin and end.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Site/terrain risks. including profitability. Ideally. MARC’s analyst shall note the construction scheduled time frame. The status of the land is also an issue to be looked at. the local labour situation. Page 8 of 17 . Independent engineer’s report. The presence of the supervisory engineer provides an independent surveillance on the construction progress. MARC shall also look at any requirement for controlled disbursement of construction funds. The qualification and experience of the management of the construction company would also be examined. However. project costing During the construction period. The engineering consultant would act as the supervisory engineer ensuring that construction works are executed in strict accordance with the turnkey contract. it may actually cost more in a long term. which is responsible for overseeing and monitoring the construction progress of the toll road on behalf of the concessionaire and its financiers. complex construction project if change orders are strictly limited. the beginning of the defect liability period and the expiry of such period. shareholders’ funds and the list of projects completed. labour and materials necessary to complete the project. reasonable liquidated damage provision and sufficient insurance coverages provide some protections in the event of unexpected delays. MARC’s analyst shall also look at the compensation payable by the government to the concessionaire if the former fails to make available the land resulting in completion delay. progress report.

pursuant to the respective CA. the scope of work. to be maintained throughout the concession period plus one year thereafter. MARC’s analyst takes note of the arrangement to manage these sub-contractors. if necessary.000. If the contractors are in default of their obligations set out in the CA. MARC shall assess the experience of the toll road operator. For example.000 as a security against the performance of the company in maintaining the structural overlay obligations. other major rating criteria include the operation and maintenance of the toll road. and a requirement to produce periodic financial reports. perhaps in the form of performance guarantee and ability to be replaced. MTD Prime contracted-out its toll operation and management and the contractor’s works are regularly monitored by MTD Prime. Ability to contract-out If the O&M activities are to be contracted-out. KLT shall procure a maintenance bond with a cap of RM3. MARC shall request for the relevant information which include: Operating and maintenance (O&M) contract A clear understanding of the operator’s relationship to project owners.000 replacing the previous bond. whilst major repairs consists mainly of road resurfacing. For example. Operational activities include the operation of the toll collection system. For example. KLT and Kesturi. Project experience of operator with toll road projects MARC’s analyst shall assess the experience and track record of the operator in operating similar toll road projects as well as the latest financial position of the operator. Toll revenues and its legal capacity The party actually handling toll revenues and its legal capacity in respect of toll collections shall be clearly defined. clearly defined responsibilities of the operator during the concession period. Routine maintenance consists of works generally repetitive in nature such as grass cutting. Page 9 of 17 . compensation in terms of amount and timing shall be assessed by MARC. MARC’s analyst shall look out for measures to cover instances where the operator’s performance is below the required performance standards. due to default by the contractor. MTD Prime is to be compensated for a sum of 5% of all fees and receivable in the last 12 months preceding the date of termination of the toll operation contract. traffic management and emergency and recovery functions. desilting and drainage system cleaning. shall provide a maintenance bond with a maximum value of RM1. equipment replacement and heavy maintenance. rights and responsibilities shall be established. roadway clearing. Upon full completion of the highway.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING OPERATION RISK ANALYSIS Apart from concession agreement and construction risk. Maintenance is broadly classified into routine maintenance and major repairs.000.

MARC’s analyst has to rely on independent traffic study report as a starting point. motor vehicles ownership growth trend. remains a key input in the determination of the credit quality.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Other factors MARC shall look at the operator’s ability and experience in handling new technology associated with toll collections. o Traffic Count Surveys In establishing the area’s traffic characteristics and existing traffic pattern. Traffic studies look at regional origin-destination patterns. The operation and maintenance costs shall be ascertained during the bond tenure. toll plazas. ramps. and relevant employment and housing growth forecasts. KLT highway will be equipped with closed circuit television and variable message sign system at interchanges. MARC shall request for a copy of the report as well as any updates or revision of such report from the client. as well as a reasonable escalation rate for these costs to be used in the cash flow projections. Scott Wilson (M) Sdn Bhd. While other factors may constrain or enhance a given project’s overall credit quality.e the balance between the cost of developing and operating the project and the revenues it is expected to generate over its useful life. at the core of our analysis is the question whether the facility is or will be self-supporting. whether reliable or not. The traffic consultants appointed by the toll road concessionaires rated by MARC include MVA Consultancy Sdn Bhd. and thus its rating. Along with the roadway survey and land use surveys. The traffic study is normally carried out by an independent traffic consultant. trip frequency. The traffic forecast may be less critical if the existing traffic and revenue can by itself support the financing facilities. Market Risk is considered the major input factor in analyzing a toll road’s project economics. Independent Traffic Study Report The traffic forecast. MARKET RISK ANALYSIS The most important underlying factor in our analysis of a toll road is its inherent project economics. Symonds Travers Morgan Sdn Bhd. Hacrow Consultants Sdn Bhd and Perunding Trafik Klasik Sdn Bhd. In assessing the market or demand risk of a toll road project. carrying out traffic surveillance and control systems. the traffic consultant conducts a traffic count survey to gather primary traffic Page 10 of 17 . which are good predictors of traffic growth pattern. i. trip purposes. and communication network to manage the toll road effectively and efficiently. the consultant would conduct on-site data collection as well as review literature study. For example.

employment growth rate are among the factors incorporated in the traffic study report. due to the discretionary nature of that traffic. including growth trend. secondary traffic data were also obtained from reliable sources to give the consultant a more comprehensive view. Other than relying on primary data. o Study Area Network The consultant’s report specifies the area network involved in the study. The objective of the survey is to ensure that future traffic demand projected by the traffic consultant are well founded and are comparable to the existing traffic demand. which offers the most potential in providing the necessary traffic demand for the Highway. KLT produced three different traffic forecast o o o Page 11 of 17 . The traffic count arising from this survey will normally be used as the base case to the revenue variable in the cash flow projection. Average traffic volume (normally units are in passengers car unit: PCU) is estimated for each travel corridor. Historical Traffic growth rates in the area The consultant’s report also tracks the historical traffic growth rates in the area. motor vehicle ownership trend. The alternative roads available in the vicinity of the toll road project are also considered. The growth pattern is highlighted and reasons for the movement in annual traffic growth are cited in the report. Possible deviation from other congested roads in the area would normally be analysed and highlighted in this report. Halcrow identified three main drivers namely the growth in background traffic with the Gross Domestic Product (GDP) as a proxy. Traffic forecasts Using the assumptions and parameters derived from the information in the earlier factors. Average daily tollable volume of vehicles over the tenure of the finance facility is estimated by the consultant. impact of toll increases and developments along the Damansara Perdana areas. A toll road that is heavily used by commuters or commercial traffic is generally stronger than a road that depends on recreational traffic. in projecting the growth in the traffic volume for the SPRINT highway. inflation rate. the traffic consultant prepares the traffic forecast scenario. For example. For example.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING data. Service Area Demographics The population density. Traffic growth rates are normally subject to socioeconomic factors namely the population growth as well as growth in motor vehicle ownership by the population in the affected areas. Key growth drivers such as matured and proposed commercial and residential development areas which serve as the catchment areas are also highlighted in the report. demographic analysis.

RATING APPROACH FOR TOLL ROADS PROJECT FINANCING scenarios. unless the toll road offers shorter travel distance or time. for SPRINT. whereby vehicles are charged according to the distance traveled. public acceptance and thus usage of toll roads are inversely correlated to the presence of alternative routes. or early construction of competitive roads. most of the toll roads rated by MARC are based on the open system. ECE1 is designed to be operated on a closed toll system. The analyst shall evaluate that in the event compensation is payable. include the uncertainties on the proposed development in the region or vicinity. o Toll rates and administration. The traffic forecast is an important variable in our analysis of the project’s cash flow projections. Comparative rates for similar toll roads within the region/area MARC’s analyst shall review and analyse the comparative rates for similar toll roads within the region/area and assess the consequent public acceptance of any increase in toll rates. toll-pricing approval risk is somewhat mitigated by the condition in the concession agreement that if the gazetted toll is lower than the agreed toll. Generally. a high case forecast for an optimistic estimate and a low case forecast incorporating conservative growth scenario. the Government shall compensate SPRINT for any reductions in the toll collections calculated based on a certain formula. implementation of measures such as high occupancy vehicle lanes following the improvement to the public transport system and construction/upgrading of other competitive public road. flexibility of raising toll rates There are two types of toll systems. o Page 12 of 17 . The toll road may have to compete with a free available alternative road. Factors that may influence future scenario. Alternatives also include other forms or mode of transportation. possible late construction of key feeder roads heading to the toll road. open toll and close toll system. Cash payment would be preferable than other means of compensation such as land. a base case for the most likely scenario. Open system is a concept where vehicles are imposed a fixed tolling charge when passing through the toll plazas according to the type of vehicle. the concession period is usually divided into sub-operating periods and the scheduled toll rate as agreed between the concessionaire and the government. MARC’s analyst shall assess the mitigation factors in the case if the gazetted toll is lower than the agreed toll. For example. For the purpose of toll rate administration. what would be the payment structure in terms of the amount and timing of such payment. less congestion or a safer route. Except for the East Coast Expressway Phase 1 (ECE1) awarded to MTD Prime.

Toll roads are subject to regulatory pressures. security. An order of priority in the payment waterfall In analyzing the cash flow projections. policy on ownership and usage of cars and political sensitivity associated with toll rate increases. and designated accounts. such as repayment. Designated Accounts The designated accounts to be opened and maintained include the finance service account. finance service reserve account. etc.75x for MARC-rated toll road projects. the minimum balance requirement in the designated accounts (if any). MARC shall always be alert for Government’s policies on road infrastructure. MARC shall look at the order of priority within the payment waterfall. escrow account. Terms.25x to 1. debt service and deposits to required reserve accounts before payments of any other obligations. which normally provides for the payments of operating expenses. conditions and covenants of the debt facility.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Last but not least. operating account. DEBT ISSUE STRUCTURE The issue structure spells out the principal terms. Another important covenant is the restriction on making dividend payments if the coverage ratio falls below a certain level (distribution test). disbursement account. there is a requirement to maintain a minimum balance in the reserve account equivalent to at least half to one year of debt service. including dividends. particularly given the ability to increase toll rates by the agreed quantum and time frame as allowed under the Concession Agreements. The minimum DSCR set as covenant ranges from 1. with longer intervals than initially agreed upon due to public resistance. Certain structural features and bond covenants that may provide additional bondholders’ protection include: Minimum Debt Service Coverage Ratio (DSCR) The minimum DSCR is minimum coverage of debt service by toll revenues. Page 13 of 17 . conditions and covenants under the issue structure are directed towards ensuring the solvency of the project and the requirement of the project concessionaire to manage its cash flows and service its debt obligations. Normally. MARC’s analyst will want to obtain a clear understanding of the functions and workings of such accounts. Some CAs have been amended or supplemented which resulted in a lower quantum of toll rate increase. etc as these serve to address the liquidity risk associated with the project. Debt repayment schedule MARC’’s analyst shall monitor the debt repayment schedule over the duration of the facility and whether the payments have been made according to the schedule.

Refinancing Risk The risk of the issuer refinancing the existing debt issue. Investment Risk The risk of capital loss in respect of the investment of funds in the designated accounts is mitigated with the requirement to restrict investments to liquid assets. This is usually mitigated by the payment structure of the bonds with repayments spread over a long number of years. the more stringent the cash flow monitoring process and financial covenants that have been set. Legal structure. MARC shall also monitor the trend in debt to equity ratio historically (for existing toll roads) and that forecasted for the entire period of the facility.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Maximum debt to equity ratio The maximum covenanted debt to equity ratio for toll road projects rated by MARC’s analyst ranges from 1. any measures which minimize cash leakage and tighter ring fenced mechanism which may provide additional protection to bondholders. Generally. credit enhancements and other financial covenants MARC’s analyst shall analyse other features including legal structure.50x to 3.00x. the higher the assigned rating. MARC’s analyst shall analyse how the issue structure addresses liquidity. Liquidity Risk This risk is somewhat mitigated through the requirement to maintain a minimum amount equivalent to six months to one year of the profit or interest in a debt reserve account throughout the tenure of the financing facility. The first serial payment would normally take effect after the highway has been commissioned and the base level of traffic has been achieved. refinancing and investment risks associated with the project. Page 14 of 17 . ISSUE STRUCTURE RISK ANALYSIS Based on the issue structure given for a toll road project. government-issued instruments or capital market instruments with minimum rating of AAA or AA with maturity dates matching the debt obligation dates.

profit before tax. the lower the risk of financial default. profit after tax. based on the financial forecast of the project. the main critical factors that have negative impact on performance usually arise from top-line items such as lower than expected traffic volume and toll rates. operating profit margin of 60% and operating profit finance cost coverage of 5. recorded revenue of RM117 million.4x. achieved an operating profit margin of 59. interest rates. Cash flow coverage MARC shall assess the earnings and cashflow projections of the toll road project over the tenure of the financing facility. The toll road project normally does not require heavy capital expenditure. The profitability measures are benchmarked to that of other MARC-rated toll road projects to ascertain the appropriate risk scoring. For example. Profitability/Earnings The main profitability measures analysed include revenue. ranging from 40% to 60%. MTD Prime (rated AA) in its audited FY2005. Due to the cash-based nature of the transactions. the financial risk analysis gravitated around the cash-generating ability of the project and the robustness of the cash generated under adverse scenarios to meet the debt obligations. MARC’s analyst shall also assess the profitability of the toll road companies. The DSCR under each scenario and the year in which the minimum DSCR would occur are noted and explanation obtained for the trend observed. tax rates and planned capital expenditure). interest paid. resulting in lower than expected revenue. MARC shall also compare the DSCR with the minimum DSCR as required by the financial covenant. MARC’s analyst shall sensitise the cash flow projections under several scenarios including worst case and best case scenarios. resulting in a more favourable rating. in particular their operating margins. besides the cash flow coverage analysis. MARC’s highest rated toll road at AA.g: inflation. For operational toll roads. The sensitised cash flow projections are then matched against the debt repayment schedule of the project to ascertain the DSCR/FCSR (debt/finance service coverage ratio). operating profit interest (finance cost) coverage. operating profit margins are strong.8x.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING FINANCIAL RISK ANALYSIS For pre-operational toll road projects such as KLT and KESTURI. and operating profit interest coverage of 0. because heavy maintenance works such as road resurfacing are only required after 5 to 7 years.6% in FY2005. Based on the financial forecasts. a key indicator of the debt servicing ability of the company. credit risk should not be a major issue. including the assumptions underlying the forecast (e. operating profit margin. MTD Prime. Therefore. SPRINT (rated AA-) achieved total revenue of RM66 million. The higher the DSCR under the various stressed scenarios. operating profit margin of 41%. For operational toll roads. The objective is to determine how much revenue is needed to cover debt service and operating expenses. Page 15 of 17 .

RATING APPROACH FOR TOLL ROADS PROJECT FINANCING In performing the sensitivity analyses. a number of variables shall be sensitized. the capital structure is an important consideration. Time series analysis is conducted to reveal any significant trend. Ramp up risk may be less of a concern if the targeted users of the new facility are already using other toll roads. discount ranging from 10% to 20%) bearing in mind the assumptions made in determining the traffic growth given the long gestation period of a highway. The issuance of subordinated debt to enhance the rating of the senior debt of the project company is not uncommon in toll road projects. MARC’s analyst shall determine the effect on the cash flow of any delays/postponement of toll rate increases as well as delays in any compensation payments due thereafter. the CFO interest coverage for the MTD Prime highway was 5. As mentioned earlier. Another pertinent variable to be considered in the sensitivity analyses is the frequency of toll rate increases. through the client and MARC’s analyst shall ascertain whether the DSCR is in compliance with the minimum DSCR requirement in the financial covenant. CFO debt coverage of the company. For example. Projects with high equity participation will have greater financial flexibility. Normal project finance cases rated by MARC are usually structured on an 80:20 or 70:30 debt to equity basis. The analyst shall determine the historical DSCR. The traffic growth over the period of the facility shall be discounted under a worst case scenario (example. and there is traffic congestion in the area or if there are a few free competitive alternatives to the new toll road. it is better to provide for a conservative traffic volume and growth in the ramp-up period in order to avoid a cash crunch in the early years of project operations. MARC shall request for confirmation of the DSCR calculation from the monitoring accountant of the facility. the initial period of attracting road users onto the newly built road and the development process of user’s acceptance. The ramp-up period can be slow and difficult. MARC’s analyst shall also analyse the past financials and carry out the variance analysis against the forecasted financial results. CFO interest coverage. In view of this.6x during the latest fiscal year. In particular. because dividend payments can be deferred during stressful time as compared to a fixed repayment schedule for debt service. for existing toll road financing. MARC shall Page 16 of 17 . Capitalisation/Financial Flexibility For pre-operational toll roads. MARC’s analyst shall consider the ramp-up period. In this case. The equity requirement is to ensure commitment on the part of the project’s sponsors. It is also noted that marketing and development of public awareness can positively impact the length and nature of a ramp-up. First.

5x. if any. For example. well below the covenanted ratio of 2.74x in FY2005. which is one of the main factors supporting its rating of AA. A favourable capital structure would comprise a relatively lower level of senior debt which should significantly reduce the probability of default risk particularly in the initial operating years. in respect of the senior debt of the project. Subordinated debts including shareholders’ advances and hybrid equity such as redeemable preference shares are usually classified as equity under the definition of project gearing. The debt to equity ratio is an important indicator of the capitalization structure to be monitored by MARC against the maximum debt to equity ratio set out in the financial covenants. SPRINT recorded a debt to equity ratio of 2. MTD Prime recorded a debt to equity ratio of 0.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING assess the features of the subordinated debt and the extent of the credit enhancement.13x in FY2005 slightly below the covenanted level of 2. © 2006 Malaysian Rating Corporation Berhad Page 17 of 17 .33x.

Sign up to vote on this title
UsefulNot useful