[RAM] RAM Ratings reaffirms West Coast Expressway's sukuk ratings

RAM Ratings has reaffirmed the respective ratings of Tranche 1 and Tranche 2 of West Coast Expressway Sdn Bhd’s (WCE or the Company) RM1 bil Guaranteed Sukuk Murabahah Programme (2015/2036), at AAA(bg)/Stable and AAA(fg)/Stable. The ratings reflect the irrevocable and unconditional kafalah guarantees extended by Bank Pembangunan Malaysia Berhad (rated AAA/Stable/P1) and Danajamin Nasional Berhad (rated AAA/Stable/P1), which enhance the credit strength of the Sukuk beyond WCE’s stand-alone credit position. 

In March 2020, the Malaysian Highway Authority (MHA) approved an extension of time (EoT) for construction along with the revised construction work programme (CWP) – referred to as Rev-4. The targeted completion date has been extended to May 2022, except for the final section – Section 7 – which is only expected to be completed by June 2024 due to delays in the finalisation of its alignment. WCE has also written to the MHA to request for an additional three-month EoT for the sections under construction, arising from delays associated with the Movement Control Order (MCO) and conditional MCO (CMCO); the outcome is still pending. 

As at end-June 2020, construction (by WCE) progress on the 193 km closed-toll stretch stood at 66.51% compared to the originally slated 71.63% (i.e. five months behind). This was mostly due to construction delays at Section 11 and work stoppage amid the COVID-19 pandemic. 

To date, construction has wrapped up for four out of 11 sections - i.e. Sections 5,8,9 and 10 - of the West Coast Expressway (the Expressway), with tolling already begun. Nevertheless, initial traffic flow has been scant, with an average daily traffic (ADT) of just 24,600 vehicles in 1H 2020 as other sections are still under construction. The ADT had also been affected by a tariff reduction for the North-South Expressway’s (NSE), the outbreak of COVID-19 and the consequent implementation of various stages of the MCO. 

Heightened competition from the NSE has also led to a downward revision of the overall traffic forecast by WCE’s traffic consultant, Atur Trafik Sdn Bhd, in its recently completed desktop traffic study. We expect traffic volume for the Expressway to remain suppressed by tough competition from the NSE and weak pandemic-related demand in the near term. RAM’s sensitised case projects traffic volume to average 231,000 vehicles per year in 2021–2025 (base case: 262,000 vehicles), with an annual average revenue of RM125.9 mil (base case: RM189.6 mil).

Meanwhile, the RM2.13 bil land acquisition cost to date has exceeded the Government of Malaysia’s (GoM) allocation of RM980 mil; the former has remained unchanged since our last review. WCE is expected to fund the additional RM376 mil of unpaid land cost via equity injections – including a portion of the RM366 mil injected by WCE’s shareholders between November 2019 and June 2020. That said, the Company is currently appealing against RM636 mil from land recovery due to the higher compensation paid to the landowners previously. Although the risks of hold-ups in obtaining land rights and heftier land cost remain, only 6% of the acquired private land has yet to undergo land enquiry.

Based on RAM’s sensitised cashflow analysis, which assumes a lower ADT and no recovery from the land appeal, WCE will need to rely on shareholder support to fund its remaining land and construction costs. As at end-June 2020, WCE’s shareholders had injected RM1.22 bil into the Company. That said, WCE’s profit payments before February 2023 are anticipated to be covered by the remaining proceeds from its project-financing facilities. The lengthy term of the concession also provides room for a refinancing exercise. Additionally, the Company’s shareholders – WCE Holdings and Road Builder (M) Holdings Bhd – have irrevocably and unconditionally committed to providing financial support to ensure the completion of the Expressway, along with up to RM400 mil under a cash-deficiency undertaking. 

Meanwhile, WCE remains exposed to the GoM’s policies vis-à-vis the infrastructure sector given the sensitivity of toll-rate hikes. Following the freeze on the NSE’s tariffs until 2058, the WCE’s toll rate increases – scheduled in its fourth year of operations and every five years thereafter – may come under scrutiny and remain a challenge from a cost perspective. In any case, the concession agreement entitles WCE to compensation from the GoM in the event of lower-than-projected tariffs. 

As with most concession-related projects, WCE is also vulnerable to regulatory and single-project risks. The construction of the Expressway is undertaken by a consortium comprising - known as IJMC-KEB Joint Venture - IJM Construction Sdn Bhd and WCE Holdings. 


Analytical contact
Aw Wei Xuan
(603) 3385 2506
weixuan@ram.com.my

Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my