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Company No.: 364803 V
RATING APPROACH FOR TOLL ROADS PROJECT FINANCING
Contact: Sandeep Bhattacharya Vice President, Ratings email@example.com +603 2092 5398 www.marc.com.my
RATING APPROACH FOR TOLL ROADS PROJECT FINANCING
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MALAYSIAN RATING CORPORATION BERHAD
RATING APPROACH FOR TOLL ROADS PROJECT FINANCING
Toll road is defined as a road on which a toll authority collects a fee for use. There are also toll bridges and toll tunnels. Malaysia has extensive toll roads, which form the majority of the expressways in the country. Malaysian expressways span more than 1,000 km in length from North to the border of Thailand, from South to the Causeway and Second Link to Singapore, from West to Klang and Pulau Indah and; from the East towards Kuantan. Most of the toll roads are in major cities and surburban areas such as Klang Valley, Johor Bahru and Penang. All of Malaysia’s toll roads are managed under the build, operate, transfer (BOT) basis. The Malaysian expressway system which started with the North-South Expressway is expanding substantially, built by private corporations under the supervision of the government highway authority. The construction, standards, management and usages of expressways in the country are subject to Federal Roads Act (Private Management) 1984. Expressways in Malaysia are defined as high speed routes with at least four lanes, consisting of two lanes in each direction with either limited or partial accessibility. Most expressways in Malaysia are limited access expressways. Under the Ninth Malaysia Plan (2006-2010), 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. Road projects which can be implemented under the privatization programme will also be identified. To expedite development of Sabah and Sarawak, a study will be undertaken to identify the required road networks. To improve traffic flows and dispersal in major cities, several urban roads will be constructed or upgraded, including the construction of ring roads and bypasses in Georgetown, Pulau Pinang; Seremban, Negeri Sembilan; and Johor Bahru,
semi-matured and matured toll roads. The ratings of these facilities range from AA. Page 2 of 17 . MARC rates a number of toll road debts/ finance facilities of several issuers.to BB-. and MARC-1 to MARC-2.Johor. MARC-rated toll roads comprise of pre-operational toll roads.
track record The project sponsor’s previous involvement with toll road projects that have been built and operated successfully will be evaluated. Successful experience in building . etc. are less than accurate. Pre-operational toll roads are exposed to precompletion or construction risk namely cost overrun. MARC’s analyst also has to rely on the independent traffic study report for projections of traffic volume and revenues.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. which are estimates and most of the time. 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.Actual and Projections o Capital Structure and Financial Flexibility PROJECT SPONSORS/MANAGEMENT Documents related to ownership structure (i. articles of incorporation and shareholders’ agreement).e. delay risk. 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 .
Page 3 of 17 .and operating toll roads would be positive rating factors. skills and experience shall also be carried out. An assessment of the key management personnel including qualification.
to provide liquidity support and to maintain a material interest in the project during the life of the financing facilities. SPRINT Holdings. SPRINT also has a strong set of shareholders namely Gamuda. The credit quality of the sponsors is important to ensure that they will be able to meet any future obligations. demonstrating the commitment of the project sponsor. Commitment Evidence of the sponsor’s commitment to the project will be looked at. the sole shareholder of SPRINT provided an undertaking to subscribe to loan stocks issued by SPRINT of up to a maximum of RM410 million. Maju Holdings (the ultimate shareholder) undertakes to cover any shortfall to fulfill profit payments due within the delayed period. In the case of Konsortium Lapangan Terjaya (KLT). SPRINT’s rating was reaffirmed at AA. LITRAK Berhad and Kumpulan Perangsang Berhad which afford the project some degree of financial flexibility. PRINCIPAL PROJECT AGREEMENTS All of the toll road concessions currently rated by MARC are awarded by the . The audited accounts of the sponsors for the past three to five years will form the basis of this assessment. in particular. For example. Higher levels of equity investments on the part of the sponsors are considered a positive factor when evaluating a project. Examples of commitment may be in the form of undertaking to cover cost overruns.in 2005. 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. If the sponsors have significant resources and time already invested in the project. contingent equity requirements.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Financial strength The financial strength of the project sponsors is assessed. The strategic importance of the project to the sponsor is also considered. they are less likely to abandon it.
the concession agreement is the first document that shall be rigorously reviewed. operate and transfer (BOT). These concessions are governed by concession agreements (CA) entered into between the concessionaire and the government. rights and responsibilities of both parties entering into the agreement. which include: Type of Concession Normally. as well as compensation to the concessionaires if there is an adverse amendment to the CA. particularly in conjunction with the ability to increase toll rates by the agreed quantum and time frame. 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 o Page 4 of 17 . The CA also serves as a basis for an evaluation of regulatory risk. and/or carry out the maintenance of the toll road during the concession period. At the end of the concession period.Government of Malaysia (GOM). The Concession Agreement amongst others spells out the job scope. toll road concession in Malaysia is based on build. The extraction of salient points within the agreement that would have bearing on the rating shall be scrutinized. Thus.
partly as a result of this minimum traffic growth guarantee. to match the toll revenue expectation. the timeliness of such support would also be an important consideration. The concession period can usually be extended under certain circumstances. . the highest rated toll road which was upgraded one notch to AA in 2005. The strategic importance of particular toll roads to the holistic development of infrastructure in Malaysia to support economic growth shall be looked at. o Availability and form of government support Clause indicating strong government support is a positive rating factor. The rights. The rationale is that government’s involvement may mitigate the non-completion or delay risk of certain projects. termed as the Support Traffic Volume (STV). MTD Prime also exhibits the most favourable score for market risk segment.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING transferred back to the government. 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. 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. 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. o o 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. This form of support is evident in MTD Prime Sdn Bhd. Nevertheless. For example.
the concessionaire will be compensated by the government. if the government terminates Page 5 of 17 .If the actual traffic volume falls below the STV. In the case of most of the toll roads rated by MARC. 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. o 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 question that needs to be addressed is how the CA protects the bondholders as a result of terminations. 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).
Thus this fact would also need to be factored into MARC’s sensitivity analyses. MTD Prime is one example where the concession period was extended for five more years. Conditions for extension of concession period There are instances where the concession period is extended. the government must pay the financiers within six months of termination the aggregate amount owing to the financiers at the date of payment. Given the public sensitivity of any toll rate revision. o CONSTRUCTION RISK ANALYSIS Two toll roads rated by MARC are still under construction and expected to be completed and fully operational in 2008. 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. o 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. the government’s liability to lenders is usually subject to a certain limit. However. in arriving at the overall ratings for the projects. 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. KLT and Konsortium Lebuhraya Utara – Timur (KL) Sdn Bhd (Kesturi) are both rated at A+. it can be expected that the approval process would be somewhat time consuming.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING the concession. . construction risk is given a risk weightage of 20%. The effect on revenue would thus need to be factored as part of MARC’s sensitivity analyses. For both cases. 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.
operation and maintenance risk and other terms of the construction contract. 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. MARC shall consider factors such as the appointed contractors. within the scheduled budget and up to the required performance standards. construct. the construction period during which the contractor is responsible to design. In reviewing these risks. projected costs. and outlines the scope of work. complete and commission the highway as well as the turnkey contract price. Turnkey Contract Agreement The turnkey contract agreement governs the contractual relationship between the concessionaire and the turnkey contractor. Page 6 of 17 .Construction risk is the risk that the toll road project is not completed on time. rights and responsibilities. delay risk.
guarantees. 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. construction works are insured against any loss or damage during the construction period up to the end of the defects liability period.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Design-build or other contracts Contracts are normally on the basis of ‘design. the turnkey contract shall ensure that the . the contractor’s all risks insurance policy. the contractor may have to pay liquidated ascertained damages payment (LAD) computed on a daily basis. The turnkey contractor has the responsibility to effect and maintain. build. Performance bonds. operate and maintain’ where the concessionaire appoints an independent consultant to undertake the detailed design. MARC shall examine the requirement for the contractor to deposit a Performance Bond equivalent to 5% of the Contract Sum. 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. amongst others. Basically. Similar to other projects of this nature. insurance policies and liquidated damages. and the period covered by the guarantee. workmen’s compensation and third party liability insurance. as well as extension of time In the event of failure to complete by the specified date. the maximum amount allowed under the contract is normally 5% of the turnkey contract price. Apart from the LAD. 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.
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. 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.concessionaire is protected against any cost overrun and delay risk. as these risks have been passed to the turnkey contractor through the back-to-back liquidated ascertained damages arrangement in the turnkey contract. 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. in KLT’s case. Page 7 of 17 . The analyst shall ensure that there are cash reserves and credit lines available to cover instances of cost overruns/delays.
Major contractors MARC shall evaluate the experience and track record of the major contractors in related toll road projects and their financial profile. 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. progress report. MARC shall monitor the construction progress of the toll road by examining the construction progress report prepared by an engineering consultant. The qualification and experience of the management of the construction company would also be examined. scheduled time frame. The engineering consultant would act as the supervisory engineer ensuring that construction works are executed in strict accordance with the turnkey contract. The status of the land is also an issue to be looked at. the land shall be free of encumbrances to enable the concessionaire to proceed with the construction works. 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.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Site/terrain risks. Ideally. Independent engineer’s report. shareholders’ funds and the list of projects completed. project costing During the construction period. which is responsible for overseeing and monitoring the construction progress of the toll road on behalf of the concessionaire and its financiers. The presence of the supervisory engineer provides an . 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. including profitability.
Page 8 of 17 . reasonable liquidated damage provision and sufficient insurance coverages provide some protections in the event of unexpected delays. MARC’s analyst shall note the construction scheduled time frame. Other considerations MARC’s analyst shall need to know the contractor’s plan for acquiring sufficient equipment.independent surveillance on the construction progress. The existence of early completion incentives. complex construction project if change orders are strictly limited. the beginning of the defect liability period and the expiry of such period. when the construction shall begin and end. while a fixed-price contract may protect against cost overruns. with respect to strikes and labour laws/rules that could affect the project and any dispute settlement/resolution process with contractors and subcontractors. it may actually cost more in a long term. labour and materials necessary to complete the project. damages or overruns. the local labour situation. MARC shall also look at any requirement for controlled disbursement of construction funds. However.
roadway clearing. traffic management and emergency and recovery functions.000. desilting and drainage system cleaning. if necessary. whilst major repairs consists mainly of road resurfacing. shall provide a maintenance bond with a maximum value of RM1. rights and responsibilities shall be established.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. Routine maintenance consists of works generally repetitive in nature such as grass cutting. Upon full completion of the highway. MARC’s analyst takes note of the . Maintenance is broadly classified into routine maintenance and major repairs. perhaps in the form of performance guarantee and ability to be replaced. Ability to contract-out If the O&M activities are to be contracted-out. MARC’s analyst shall look out for measures to cover instances where the operator’s performance is below the required performance standards.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING OPERATION RISK ANALYSIS Apart from concession agreement and construction risk. For example.000 replacing the previous bond. pursuant to the respective CA. 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. MARC shall assess the experience of the toll road operator. KLT and Kesturi. Operational activities include the operation of the toll collection system. to be maintained throughout the concession period plus one year thereafter. clearly defined responsibilities of the operator during the concession period. the scope of work. KLT shall procure a maintenance bond with a cap of RM3. equipment replacement and heavy maintenance.000.
MTD Prime contracted-out its toll operation and management and the contractor’s works are regularly monitored by MTD Prime.arrangement to manage these sub-contractors. If the contractors are in default of their obligations set out in the CA. 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. compensation in terms of amount and timing shall be assessed by MARC. 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. 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. Page 9 of 17 . For example. due to default by the contractor. For example.
toll plazas. Market Risk is considered the major input factor in analyzing a toll road’s project economics. For example. The traffic consultants appointed by the toll road concessionaires rated by MARC include MVA Consultancy Sdn Bhd. and communication network to manage the toll road effectively and efficiently. remains a key input in the determination of the credit quality. KLT highway will be equipped with closed circuit television and variable message sign system at interchanges. at the core of our analysis is the question whether the facility is or will be selfsupporting. Hacrow Consultants Sdn Bhd and Perunding Trafik Klasik Sdn Bhd. MARKET RISK ANALYSIS The most important underlying factor in our analysis of a toll road is its inherent project economics.e the balance between the cost of developing and operating the project and the revenues it is expected to generate over its useful life. The traffic forecast may be less critical if the existing traffic and revenue can by itself support the financing . While other factors may constrain or enhance a given project’s overall credit quality. Independent Traffic Study Report The traffic forecast. The operation and maintenance costs shall be ascertained during the bond tenure. and thus its rating. as well as a reasonable escalation rate for these costs to be used in the cash flow projections. i. In assessing the market or demand risk of a toll road project. Symonds Travers Morgan Sdn Bhd. carrying out traffic surveillance and control systems. ramps. Scott Wilson (M) Sdn Bhd. MARC’s analyst has to rely on independent traffic study report as a starting point.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. whether reliable or not.
trip purposes. o pattern. trip frequency. Along with the roadway survey and land use surveys. the consultant would conduct on-site data collection as well as review literature study. The traffic study is normally carried out by an independent traffic consultant. MARC shall request for a copy of the report as well as any updates or revision of such report from the client. Traffic studies look at regional origin-destination patterns. which are good predictors of traffic growth pattern. motor vehicles ownership growth trend. the traffic consultant conducts a traffic count survey to gather primary traffic Traffic Count Surveys In establishing the area’s traffic characteristics and existing traffic Page 10 of 17 . and relevant employment and housing growth forecasts.facilities.
The growth pattern is highlighted and reasons for the movement in annual traffic growth are cited in the report. o Historical Traffic growth rates in the area The consultant’s report also tracks the historical traffic growth rates in the area. o Service Area Demographics The population density. Possible deviation from other congested roads in the area would normally be analysed and highlighted in this report. Other than relying on primary data. The traffic count arising from this survey will normally be used as the base case to the revenue variable in the cash flow projection. Key growth drivers such as matured and proposed commercial and residential o . Average traffic volume (normally units are in passengers car unit: PCU) is estimated for each travel corridor. motor vehicle ownership trend. 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. 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.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING data. employment growth rate are among the factors incorporated in the traffic study report. which offers the most potential in providing the necessary traffic demand for the Highway. Study Area Network The consultant’s report specifies the area network involved in the study. The alternative roads available in the vicinity of the toll road project are also considered. secondary traffic data were also obtained from reliable sources to give the consultant a more comprehensive view.
Average daily tollable volume of vehicles over the tenure of the finance facility is estimated by the consultant. due to the discretionary nature of that traffic. demographic analysis. Traffic forecasts Using the assumptions and parameters derived from the information in the earlier factors. For example.development areas which serve as the catchment areas are also highlighted in the report. For example. A toll road that is heavily used by commuters or commercial traffic is generally stronger than a road that depends on recreational traffic. Halcrow identified three main drivers namely the growth in background traffic with the Gross Domestic Product (GDP) as a proxy. the traffic consultant prepares the traffic forecast scenario. KLT produced three different traffic forecast o Page 11 of 17 . in projecting the growth in the traffic volume for the SPRINT highway. including growth trend. impact of toll increases and developments along the Damansara Perdana areas. inflation rate.
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. a high case forecast for an optimistic estimate and a low case forecast incorporating conservative growth scenario. whereby vehicles are charged according to the distance traveled. possible late construction of key feeder roads heading to the toll road. Factors that may influence future scenario. include the uncertainties on the proposed development in the region or vicinity.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING scenarios. a base case for the most likely scenario. For the purpose of toll rate administration. Except for the East Coast Expressway Phase 1 (ECE1) awarded to MTD Prime. or early construction of competitive roads. the Government shall compensate SPRINT for any reductions in the toll o . ECE1 is designed to be operated on a closed toll system. 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. Toll rates and administration. For example. most of the toll roads rated by MARC are based on the open system. open toll and close toll system. MARC’s analyst shall assess the mitigation factors in the case if the gazetted toll is lower than the agreed toll. The traffic forecast is an important variable in our analysis of the project’s cash flow projections. flexibility of raising toll rates There are two types of toll systems. 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. the concession period is usually divided into suboperating periods and the scheduled toll rate as agreed between the concessionaire and the government. for SPRINT.
Page 12 of 17 . what would be the payment structure in terms of the amount and timing of such payment. The toll road may have to compete with a free available alternative road. Generally. o 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. unless the toll road offers shorter travel distance or time. Alternatives also include other forms or mode of transportation. Cash payment would be preferable than other means of compensation such as land. public acceptance and thus usage of toll roads are inversely correlated to the presence of alternative routes. The analyst shall evaluate that in the event compensation is payable. less congestion or a safer route.collections calculated based on a certain formula.
.25x to 1. with longer intervals than initially agreed upon due to public resistance. The minimum DSCR set as covenant ranges from 1. including dividends. 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. such as repayment. security. Toll roads are subject to regulatory pressures. particularly given the ability to increase toll rates by the agreed quantum and time frame as allowed under the Concession Agreements. which normally provides for the payments of operating expenses. policy on ownership and usage of cars and political sensitivity associated with toll rate increases. debt service and deposits to required reserve accounts before payments of any other obligations. DEBT ISSUE STRUCTURE The issue structure spells out the principal terms. 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. Terms. Some CAs have been amended or supplemented which resulted in a lower quantum of toll rate increase. An order of priority in the payment waterfall In analyzing the cash flow projections.75x for MARCrated toll road projects. Another important covenant is the restriction on making dividend payments if the coverage ratio falls below a certain level (distribution test). and designated accounts. MARC shall always be alert for Government’s policies on road infrastructure. MARC shall look at the order of priority within the payment waterfall.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING Last but not least. conditions and covenants of the debt facility.
MARC’s analyst will want to obtain a clear understanding of the functions and workings of such accounts. finance service reserve account. Normally. Designated Accounts The designated accounts to be opened and maintained include the finance service account. etc as these serve to address the liquidity risk associated with the project. escrow account. disbursement account. etc.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. operating 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. Page 13 of 17 . the minimum balance requirement in the designated accounts (if any).
ISSUE STRUCTURE RISK ANALYSIS Based on the issue structure given for a toll road project. MARC’s analyst shall analyse how the issue structure addresses liquidity. Legal structure. The first serial payment would normally take effect after the highway has been commissioned and the base level of traffic has been achieved. Refinancing Risk The risk of the issuer refinancing the existing debt issue. This is usually mitigated by the payment structure of the bonds with repayments spread over a long number of years.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. the higher the assigned rating. Generally. the more stringent the cash flow monitoring process and financial covenants that have been set. 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. 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. credit enhancements and other financial covenants MARC’s analyst shall analyse other features including legal structure.50x to 3. any measures which minimize cash leakage and tighter ring fenced mechanism which may provide additional protection to bondholders. refinancing and investment risks associated with the project. Investment Risk The risk of capital loss in respect of the investment of funds in the .00x.
Page 14 of 17 .designated accounts is mitigated with the requirement to restrict investments to liquid assets. government-issued instruments or capital market instruments with minimum rating of AAA or AA with maturity dates matching the debt obligation dates.
operating profit margin of 60% and operating profit finance cost coverage of 5. because heavy maintenance works such as road resurfacing are only required after 5 to 7 years. MTD Prime (rated AA) in its audited FY2005. and operating profit interest coverage of 0. Therefore. For operational toll roads. interest paid. operating profit interest (finance cost) coverage. MARC’s highest rated toll road at AA.8x. Cash flow coverage MARC shall assess the earnings and cashflow projections of the toll . SPRINT (rated AA-) achieved total revenue of RM66 million. 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. profit after tax. MARC’s analyst shall also assess the profitability of the toll road companies. resulting in lower than expected revenue. profit before tax. operating profit margin. credit risk should not be a major issue. recorded revenue of RM117 million. in particular their operating margins.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING FINANCIAL RISK ANALYSIS For pre-operational toll road projects such as KLT and KESTURI. besides the cash flow coverage analysis. operating profit margin of 41%.6% in FY2005.4x. The toll road project normally does not require heavy capital expenditure. For operational toll roads. 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. achieved an operating profit margin of 59. ranging from 40% to 60%. MTD Prime. For example. Profitability/Earnings The main profitability measures analysed include revenue. operating profit margins are strong. Due to the cash-based nature of the transactions. The profitability measures are benchmarked to that of other MARC-rated toll road projects to ascertain the appropriate risk scoring.
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). interest rates. based on the financial forecast of the project. tax rates and planned capital expenditure). MARC shall also compare the DSCR with the minimum DSCR as required by the financial covenant. The objective is to determine how much revenue is needed to cover debt service and operating expenses.g: inflation. a key indicator of the debt servicing ability of the company. The DSCR under each scenario and the year in which the minimum DSCR would occur are noted and explanation obtained for the trend observed.road project over the tenure of the financing facility. Page 15 of 17 . The higher the DSCR under the various stressed scenarios. Based on the financial forecasts. the lower the risk of financial default. resulting in a more favourable rating. MARC’s analyst shall sensitise the cash flow projections under several scenarios including worst case and best case scenarios. including the assumptions underlying the forecast (e.
As mentioned earlier. 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. CFO debt coverage of the company. The ramp-up period can be slow and difficult. In particular. Time series analysis is conducted to reveal any significant trend. Another pertinent variable to be considered in the sensitivity analyses is the frequency of toll rate increases. The analyst shall determine the historical DSCR. Ramp up risk may be less of a concern if the targeted users of the new facility are already using other toll roads. for existing toll road financing. 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. CFO interest coverage. MARC shall request for confirmation of the DSCR calculation from the monitoring . MARC’s analyst shall also analyse the past financials and carry out the variance analysis against the forecasted financial results. In view of this. It is also noted that marketing and development of public awareness can positively impact the length and nature of a ramp-up. a number of variables shall be sensitized. the initial period of attracting road users onto the newly built road and the development process of user’s acceptance. The traffic growth over the period of the facility shall be discounted under a worst case scenario (example. MARC’s analyst shall consider the ramp-up period. and there is traffic congestion in the area or if there are a few free competitive alternatives to the new toll road.RATING APPROACH FOR TOLL ROADS PROJECT FINANCING In performing the sensitivity analyses. First. 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.
For example. Normal project finance cases rated by MARC are usually structured on an 80:20 or 70:30 debt to equity basis. In this case. the CFO interest coverage for the MTD Prime highway was 5. because dividend payments can be deferred during stressful time as compared to a fixed repayment schedule for debt service. the capital structure is an important consideration. The equity requirement is to ensure commitment on the part of the project’s sponsors. through the client and MARC’s analyst shall ascertain whether the DSCR is in compliance with the minimum DSCR requirement in the financial covenant. Projects with high equity participation will have greater financial flexibility. MARC shall Page 16 of 17 .accountant of the facility. Capitalisation/Financial Flexibility For pre-operational toll roads. The issuance of subordinated debt to enhance the rating of the senior debt of the project company is not uncommon in toll road projects.6x during the latest fiscal year.
Subordinated debts including shareholders’ advances and hybrid equity such as redeemable preference shares are usually classified as equity under the definition of project gearing. SPRINT recorded a debt to equity ratio of 2. which is one of the main factors supporting its rating of AA.5x. in respect of the senior debt of the project. well below the covenanted ratio of 2. .74x in FY2005.33x. 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. For example. 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. if any.13x in FY2005 slightly below the covenanted level 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.
© 2006 Malaysian Rating Corporation Berhad Page 17 of 17 .