A potential downgrade for MEX II bonds as toll concessionaire faces growing economic challenges.   

By FSMOne Research Team 

Following the local rating agency Malaysian Rating Corporation Bhd’s (MARC) downgrade of MEX II Sdn Bhd’s RM1.30 bil Sukuk Murabahah Programme and RM150 mil Junior Bonds Issuance late last year, the issuer has missed its junior bond’s coupon payments due in October 2019 and April 2020.

In this article, we look to share our views on MEX II sukuks. 

Our thoughts on MEX II bonds

We think there could be another downgrade due to: 

In light of the missed coupon payments of MEX II junior bonds, we have proceeded to contact MARC, which has stated that the MEX II Expressway requires 9 months to complete after the approval. Assuming the approval is granted this month (May), the highway may only be completed in February 2021. 

(MEX II is an 18km, three-lane dual carriageway that will commence at Putrajaya interchange and merge onto the existing Lebuhraya KLIA in Sepang. Maju Holdings Sdn Bhd is the owner of MEX II.)

The construction delay triggered by the MCO could cause MEX II’s debt servicing metrics to deteriorate further. In addition, should the current situation prolong past November 2020, MEX II could face a technical default from a breach in 1.75X Financial Service Coverage Ratio (FSCR). There is also a narrow time frame for a debt restructuring effort to complete before November 2020.

Taking all the above into account, on top of the continuing issues we have highlighted in our previous update, the margin of safety for bondholders is deteriorating. As such, we continue to hold a negative stance on MEX II bonds. 

Local funds with concentrated exposure to MEX II bonds could take a hit

In our previous update, we have highlighted several funds that are experiencing increasing concentration risk in MEX II bonds. These funds have been liquidating other positions to meet redemption requests, which caused these funds to have higher exposure to non-liquid holdings such as the MEX II bonds. 

Investors who are holding onto funds that have more than 15% exposure into MEX II bonds may not be able to maintain a properly diversified fixed income exposure (see table below).

Funds that have high exposure towards MEX II sukuk  

Takeaway

All in all, the current economic climate is posing additional challenges to MEX II. A possible construction delay may contribute to its deteriorating financial metric. Additionally, a setback in both the Bridge 13’s approval and debt restructuring timeline has increased the possibility of a rating downgrade of the MEX II bonds going forward. 

Should a rating downgrade occur, funds with a large exposure to these bonds may experience a notable drawdown in their NAVs. 

However, it is also worthwhile to note that upside risks stem from a successful debt restructuring effort or a removal of the stop-work order from the government, where MEX II bond prices could witness a potential recovery.


The Research Team is part of FSMOne.


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