Reuters, 3 September 2012
KUALA LUMPUR, Sept 3 — Creditors facing a potential default on the MRCB Southern Link project bonds have been offered a lifeline after the federal government said last Thursday that it would take over the new Eastern Dispersal Link (EDL) in Johor Baru from the troubled concessionaire.
Fears that MRCB Southern Link was heading for a default in as little as four months prompted the government to step forward. The saviour in this case, however, was also the offender: it was the government’s ban on collecting tolls for the new highway project that caused default concerns in the first place.
The fact that the toll ban is legal under a concession agreement highlights the regulatory risks faced in privatised projects in the country.
The timing is not great for such a lack of regulatory clarity. Malaysia is in the middle of ramping up a massive infrastructure development programme that will need billions of dollars from the bond market. The federal government is on a RM230 billion programme to build a host of infrastructure projects, including power plants, toll roads, railways and property projects.
Some of the projects have already been awarded to private operators and tapped the market this year, including Prasarana’s RM2 billionn dual-tranche deal two weeks ago, Tanjung Bin’s RM3.29 billion funding in March and Tenaga Nasional’s RM4.85 billion financing last year.
Infrastructure projects are expected to drive the ringgit bond market to a record RM100 billion in volume this year, surpassing last year’s gross volume of RM67 billion.
But the government has shown in the past that it is not immune to public sentiments. It has interfered and caused concession agreements to seize up. After the global financial crisis, the government halted toll rate hikes in several projects, forcing some bond issuers to restructure debt.
The latest stumble came in March this year. The federal government banned MRCB from implementing toll charges on a newly completed EDL in Johor Baru. That road opened on April 1 and has since then seen no cashflow.
The concessionaire managed to meet its previous interest payment obligations. But investors were not certain the next payment, due in December, would come through. RAM Ratings suggested as much when it reported that MRCB made an unexpected RM40 million payment to its engineering, procurement and construction contractor, despite private assurances that it would keep aside enough funds to pay the interest in December.
This leaves only RM21 million in the company’s cash reserves, hardly sufficient to meet a RM47 million cumulative interest payment due December 21 on its RM1.04 billion senior and junior sukuk, as well as on a RM220 million syndicated bank loan. The shortfall is a reason RAM Ratings downgraded the long-term ratings on the RM845 million senior bond to BB3 from A2 and the RM199 million junior sukuk to C1 from BBB2.
Earlier last week, there was no sign from MRCB that it planned to fund any shortfall in meeting the debt obligations, the RAM report said. The company has not breached any of the technical covenants in the bonds, and the payment to the EPC contractor has not triggered an event-of-default clause for bondholders.
If MRCB defaulted on its payments, it would be one of the first toll road concessionaires to do so.
A default would impinge on an otherwise booming bond market. MRCB had been in talks since March with the federal government about plans for compensation in lieu of the toll revenues. But the discussions had dragged on without any conclusive details until last Thursday.
Officials from the Prime Minister’s Office said the government would take over the project but it was short on details. Final details of the takeover are expected only before the end of December. But the market will expect the government to take on the debt and possibly impose a smaller toll than the proposed RM6.20 under the original concession.
The government’s move was not completely unexpected. It has resolved troubled concessionaires in the past by extending the concession, reducing the toll or water rate, or buying bonds.
In June, the government established Pengurusaan Air, which sold a RM5.8 billion sukuk in June 11 to buy various debt facilities from several water concessionaires.
“Regulatory risks have increased compared with the past, but the government has in general shown that it would treat equitably those concessionaires hurt by its edicts,” said one credit analyst.
But detailed negotiations for MRCB may be impeded by an impending general election that could make decision-makers wary of undertaking any unpopular actions. Elections were expected to take place after September. But preparations for the Haj in October and the annual Umno assembly in the last quarter of the year may further push back the elections to next year.
In the meantime, the company is thought to be seeking creditors’ consent to amend terms on its sukuk, particularly to waive certain covenants such as the finance service reserve account bank guarantees to allow drawdowns for the toll road operations to continue. — Reuters
