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This article first appeared in The Edge Malaysia Weekly on May 31, 2021 - June 6, 2021

MORE highway concessionaires are looking to form highway trusts, as they are deemed the most market-friendly option given the resistance to toll hikes. Companies that are said to be looking at highway trusts include IJM Corp Bhd, PLUS Malaysia Bhd and Ekovest Bhd.

The Edge on May 10 reported that Gamuda Bhd has proposed to the government to place the four highway concessions under its stable into a trust company.

“Actually, almost all of the highway concessionaires are looking at forming a trust for their highway assets. However, they are waiting for Gamuda’s deal to materialise first before they make a move for their own assets,” says an industry observer.

Previous proposals for the government to take over the highway concessionaires did not find favour with many, as it means that those living in rural areas will also shoulder the costs to reduce the burden of those living in urban areas, where most of the tolled highways are located.

Therefore, a more palatable solution is needed — one that does not require the government to fork out billions of ringgit to acquire existing highway concessions while doing away with scheduled increases in toll rates.

Earlier this month, news broke that a highway trust had been proposed to acquire the concessions of four highways in the Klang Valley, all majority-owned by Gamuda.

The trust will issue bonds, which will have a coupon rate of between 4% and 5%, to acquire the concessions. The target market for the bond investors are pension and mutual funds.

To pay the bondholders the annual coupon rate, toll will still be charged. However, there will no longer be scheduled increases in toll rates while the concession period will be extended to ensure the bonds are redeemed.

Observers say this proposal is a capital market solution in the sense that the concession holders would still be compensated and bondholders would be able to get decent returns. Moreover, public funds would not be utilised to ensure that toll rates will not be increased.

A corporate finance executive opines that highway trusts are an option in the current market conditions. However, he says that if the proposals by the other concession holders are the same as Gamuda’s, they have limited upside for the holders of the trust.

“It is just another debt fundraising exercise. There will not be any upside for the bondholders of the trust as it is capped for debt exposure. Upside for existing shareholders is also already capped as they already monetise its equity value in the new debts in the highway trust,” says the executive.

However, some argue that the current system is already fair, as commuters are only paying toll as and when they use the highways. Nevertheless, toll rates have been a political hot potato for several years now.

In the run up to the 14th general election, the Pakatan Harapan coalition promised to renegotiate toll concessions it deemed as “unfair” and to gradually take over and eventually abolish tolls.

During the 22 months of its administration, the coalition managed to renegotiate toll concessions with PLUS by extending the concession period by 20 years and doing away with the 5% rise in toll rates every three years.

In return, PLUS reduced the toll rates on all its highways by 18%.

The deal saved taxpayers a total of RM42 billion, which is the potential compensation that the government would have had to pay PLUS if the toll rates were not allowed to be increased for the remaining concession period.

In 2019, the federal government also tried to acquire four highways, which Gamuda has a majority stake in, for RM6.2 billion. The highways are Lebuhraya Damansara-Puchong (LDP), Sistem Penyuraian Trafik KL Barat (Sprint), Lebuhraya Shah Alam (Kesas) and the Smart Tunnel.

However, the deal did not go through in the first round, even though Gamuda’s board of directors had already decided to accept the offer. Then in April this year, Works Minister Datuk Seri Fadillah Yusof said the government was reviewing a new proposal put in by Gamuda.

Earlier this month, Gamuda confirmed that it was currently in talks with the government to put forth its proposal to sell its four highway concessions to a private highway trust. The group also confirms that the toll hike will be waived by extending the tenures of the four concessions, which means that road users will continue to pay the same amount for a longer period.

However, other highway concession holders are keeping mum on the issue.

IJM declined to comment when contacted while PLUS did not manage to respond as at press time. A representative of Ekovest said she was not aware of any such plans.

The Movement Control Orders (MCOs), which started in March last year, reduced traffic on several highways, negatively impacting the concessionaires.

In the six-month period ended Dec 31, 2020, Ekovest’s toll operations recorded gross profits of RM54.5 million, a 24.5% year-on-year decline from RM72.17 million. Revenue from the segment declined 18.68% to RM76 million. The group spent RM538.05 million in capital expenditure on its concession assets.

On May 24, CIMB Investment Bank Bhd filed with Bank Negara Malaysia’s Fully Automated System for Issuing/Tendering (FAST) website that Ekovest’s subsidiary, Konsortium Lebuhraya Utara-Timur (KL) Sdn Bhd (Kesturi), will defer the unpaid portion of its RM180 million junior bonds’ cumulative coupon payment due on June 2, 2021 to the next payment date of Dec 2, 2021 after obtaining the consent of bondholders.

Kesturi is the concession owner of the Duta Ulu-Kelang Expressway (DUKE) and Setiawangsa-Pantai Expressway in the Klang Valley.

On Nov 25, 2020, Ekovest clarified that the company had always been the sole subscriber of the RM180 million junior bonds issued by Kesturi and that the deferment of the unpaid portion of the securities’ coupon is allowed under the trust deed.

In a statement, Ekovest said that, in accordance with the terms of the trust deed executed on Nov 23, 2013, Kesturi shall make payment for the accrued coupons under the junior bonds upon meeting the requisite conditions.

In the financial year ended June 30, 2020, Kesturi made a net loss of RM33 million on the back of RM154.2 million in revenue.

At the group level, Ekovest had outstanding a total of RM5.4 billion in Islamic medium-term notes and RM528 million in revolving credits. Its cash and bank balances stood at RM130.8 million, and the group had short-term deposits amounting to RM284.3 million. It also had RM1.26 billion in investment funds.

Gamuda’s water and expressway concession business also suffered due to the MCO. In the six-month period ended Jan 31, 2021, the segment reported net profits of RM104.5 million, compared with RM120.1 million in the previous corresponding period.

According to Gamuda, traffic volume on all four highways had returned to pre-MCO levels until the reimposition of the Conditional MCO in the middle of October last year. With the more stringent MCO 2.0 that started in mid-January this year, traffic volume on all four highways trended down again.

As at end-February 2021, traffic volume at LDP, Kesas and Sprint was at 90%, 80% and 70% of pre-MCO levels respectively. Traffic volume at Smart Tunnel only registered 50% of pre-MCO levels.

 

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