New Private Financing of Toll Road - Lembaga Lebuhraya Malaysia 2 _KKR-LLM 12 Nov by... · 2018. 11. 13. · Private Financing of Toll Road Strictly Private & Confidential 12 November

Private Financing of Toll Road

12 November 2018Strictly Private & Confidential

This Presentation was prepared exclusively for the benefit and internal use of the recipient. This Presentation does not carry any

right of publication or disclosure to any other party. Neither this Presentation nor its content may be used for any other purpose

without prior written consent of AmInvestment Bank Berhad.

The information in this Presentation reflects prevailing conditions and our views as of this date, all of which are accordingly subject

to change. In preparing this Presentation, we have relied upon and assumed, without independent verification, the accuracy and

completeness of any information available from public sources.

Except as required by law, AmInvestment Bank Berhad and its officers, employees, agents and advisers do not accept any

responsibility for or liability whatsoever in respect of any loss, liability, claim, damage, cost or expense arising as a consequence

(whether directly or indirectly) of reliance upon any information or any statement or opinion contained in this document, nor do they

make any representation or warranty (whether expressed or implied) as to the accuracy or completeness of this documents or its

contents. This Presentation is not an offer document and cannot give rise to any contract.

AmInvestment Bank Berhad

(Company No: 23742-V)

A member of the AmBank Group

Tel:+(603) 2036 2633

Fax: +(603) 2031 2189

23rd Floor, Bangunan AmBank Group,

55 Jalan Raja Chulan, 50200 Kuala

Lumpur

www.ambank.com.my

Prepared and Presented by:

Page 2

12 November 2018

Some Key Financial Issues of Toll Road Project

Globally, interest in private toll roads is particularly strong because Governments require

alternative methods of financing their extraordinary transport needs. Tolling has also

become an attractive option for managing traffic demand on increasingly congested

highways.

Many of the challenges to developing and financing toll roads are similar to those faced by

other infrastructure projects, which are typically capital-intensive and share certain risks,

including construction risk, political risk, currency risk, and force majeure risk. But toll roads

face greater risks in certain important areas, including acquisition of long segments of right-

of-way, unforeseen geological and weather conditions that may increase costs and cause

delays, and, perhaps most important, the unpredictability of future traffic and revenue levels.

Financial aspects are central to the implementation of any project because the ultimate

criterion for success is almost always measured by its financial viability which will

ultimately affect the ability of a project in attracting investment and lending to enable the

implementation and completion of the project. An integrated approach to financial

planning and implementation on the project is therefore critical to ensure success.

Introduction

Page 3

12 November 2018


The underlying success criterion of a project is to structure it to be commercially viable to

investors, bankable to commercial lenders, and at the same time acceptable to the

Government. Extensive and in-depth financial analysis will have to be undertaken to

assess the viability and bankability of the project as well as to prepare a framework for

negotiation with the Government. By evaluating the project economics, we will be able to

evaluate the key financial issues involved in designing an optimal structure and financing

framework for the project.

In most projects, there tend to be conflicting interests between the negotiating parties. For

instance, shareholders of a project will require an acceptable return on investment at a

given risk level. The Government, on the other hand, being cautious with perceived

super-profits enjoyed by the private sector may not agree to excessive tariff charges and

frequent toll rate reviews.

Financial /

Commercial

and Social

Objectives

Commercially

Viable

Page 4

12 November 2018


From our experience, the Government seeks to address this issue by restricting the project

returns. In cognisance of this, detailed financial analysis and planning in the early stage of

the project will be pertinent to achieve an optimal position for both parties concerned.

which involved to explore and consider various financial options which will maximise the

shareholders' return and at the same time, be acceptable to the Government.

A key determinant in assessing the strength of a projected cashflows is a feasible and

achievable toll structure. Proposed initial toll rates must be commensurable with the level

of projected capital investment and other costs related to the project and possibly

comparable to other road projects. Meanwhile, it is important that the Government agrees

to a toll formula that incorporates cost drivers including capital expenditure, operating and

management costs and financing costs. Nevertheless, there may be a need to seek some

government supports (financial and non-financial) to ensure that the toll structure is

'affordable'

Toll

Structure

Page 5

12 November 2018


The importance of an appropriate project structure cannot be over emphasized as it is

through the commercial and legal framework (vide the terms of the contractual

arrangements) afforded between parties to the project, that the various project risks are

managed and mitigated. The objective is to allocate risks to the respective parties that are

best-suited to bear them.

A possible structure of the relationship between various relevant parties in the project is

depicted as follows:

Project

Structure

Page 6

12 November 2018


SPECIALPURPOSE VEHICLE

LENDERSLENDERS O&M

OPERATOR

O&M

OPERATOR

INDEPENDENTCONSULTING

ENGINEERS

INDEPENDENTCONSULTING

ENGINEERSINSURERS

INSURERS

GOVERNMENTGOVERNMENT

SHAREHOLDERSSHAREHOLDERS

Shareholders’ Agreement

Concession Agreement

Loan Agreement

InsuranceCoverage

ConsultancyAgreement

Operations & Maintenance Agreement

Construction Contract

END USERSEND USERS

Revenue

CONTRACTORSCONTRACTORS

Typical Structure of a Project

Page 7

12 November 2018


An appropriate funding structure is essential to attract investment and financing

required for a project. Generally, investors seek to minimise capital outlay and maximise

returns. Thus, an optimal capital and financing framework will be one that is tailored to the

commercial and financial objectives (such as required returns, cashflow, tenure, risk attitude,

security required, etc.) of the fund providers and at the same time, affordable by its projected

cashflow profile.

Notwithstanding limited lending situation (if any), it is envisaged that investors would like to

finance the project on a non/limited recourse basis. The key issue to this type of financing is

to ensure that the projected cashflows of the project can be achieved. In this respect, it must

be established that the project can be completed on a timely manner and at the proposed

cost; and that the project upon completion can generate sufficiently robust revenue to repay

the loan principal and interest as scheduled.

Capital and

Financing

Structure

Page 8

12 November 2018


With the current financial market condition, an appropriate shareholding structure is crucial to

ensure that the project will be bankable. In this respect, the financial strengths and technical

capabilities of the shareholders are crucial for lenders’ assessment when fund raising

exercise is undertaken.

The success of a project requires a clear understanding of various risks involved, the

mechanisms available to mitigate such risks and, more importantly, how the risks are to be

allocated to the respective project participants. Risk analysis on the project is crucial to

identify the element of risks; and sensitivity analysis on the projections is necessary to

assess the potential adverse impact on the project’s profitability and cashflow should the

risks eventuate

Possible key risk areas to which the project may be exposed to, are briefly outlined as

follows :

Shareholding

Structure

Risk Analysis

and

Mitigation

Page 9

12 November 2018


Risk Analysis

and

Mitigation

Risks during Construction Period

The risk areas during construction will include delayed completion and cost overrun. Failure

to address and cover these risks adequately may delay the commencement of operations

which in turn will result in additional financial charges or loss of revenue incurred on the

project.

Risks during Operating Period

Lower traffic/revenue and higher operating costs are the risk areas that the project will be

exposed to when it commences operation. Variations to traffic forecast and

operation/maintenance costs of the project will invariably affect the projected return to

investors and the project company’s ability to meet its loan commitments.

Page 10

12 November 2018

Key Critical Success Factor of Toll Road Project

Critical

Success

Factors

Bankable

Project

Agreements

Government

Assistance

Financing

Options / Plan

Environmental

& Social

Impact

Toll Structure –

lower initial toll

rate / flat toll

rate

Revenue

projection &

Timing other

Major

Developments

Capital and

Operating

Expenditure

estimates

Choice of

Alignment – no

malay / foreast

reserves /

pocket of land

Project Structure Considerations

Overall Project structure design

and risk allocation at early stage

is crucial to achieve timely

project implementation.

Alignment of Stakeholder

objectives is critical in garnering

support for the project.

As the Financial Adviser, we will

try to quantify these

considerations and to propose a

project structure that is

acceptable to all stakeholders,

including potential investors and

lenders.

Page 11

12 November 2018

Debt Funding Options

Sukuk Structured Loan Syndication Two Stages Financing

Maximum Size & Market Base

• Up to 80% of Project

• More liquidity and depth as compared to the loan market

• Margin of up to 80% of the Project value

• Margin of up to 80% of the Project value

Max Tenure • Up to 23 - 25 years (at min. AA3) • Up to 10 years During Construction: 5-year STF-i

Post Construction: Up to 20-year

Senior Sukuk

Distribution/ Investor Base

• Wider distribution base –pension funds, insurance companies, asset management companies, financial institutions, high net worth individuals

• Limited to financial institutions (e.g. commercial / investment banks)

• Given the size and risk, likely to be syndicated or club deal basis

Refer to Structured Loan Syndication and Sukuk columns

Pricing & Fees

• Typically fixed rate which allows upfront fixing of funding costs

• No stamp duty for SC approved issuance

• No facility or commitment fee

• Issuance costs incurred for certain Sukuk structures may tax deductible

• Fixed or floating rates

• For Ringgit loan, typically on Cost of Funds (“COF”) + spread

• Commitment fee on unutilised facility

• Stamp duty of 0.5% on loan amount (20% discount for Islamic loans)

Approvals Required

• SC • Respective banks’ credit committees

Rating • Required • Not Required

Issuance / Drawdown

• Typically upfront. Forward issuances possible

• Staggered drawdown

Repayment Profile

• Bullet or serial repayment • Amortised subject to avg. life <10yrs

Execution Process

• About 12 weeks • 8-12 weeks before first drawdown

Page 12

12 November 2018

Debt Funding OptionsSukuk Structured Loan Syndication Two Stages Financing

Key Features Up to 23-year upfront fixed rate

issuance with 3-year grace period.

Completion guarantee from EPCC

Shareholders undertaking for cost

overrun

Tranching based on finalised cash

flow projection / purchasing

agreements.

Distribution to shareholders upon

meeting finance service cover ratio

covenant.

Completion Guarantee from

EPCC to support financing during

construction.


overrun

Able to consider a partial balloon

payment structure with

refinancing at the end of the

proposed financing tenure (if a

longer financing period is

required).

Up to 100% of the Sukuk amount to

refinance the balloon repayment for

the bridging loan

Limited / Non-recourse financing

Completion guarantee from EPCC


overrun

Issuance undertaking from Sponsors

or SBLC 12 months before

refinancing

Key Benefits Standalone project financing

leveraging on cash flows from

projected toll revenue.

Upfront issuance for funding

certainty to mitigate liquidity risk.

Subject to negative carry from

upfront drawdown however this

may be addressed via forward

starts and also mitigated via

income derived from utilising

Sukuk proceeds by investing in

permitted investments

Extended financing tenor based on

the finalised cash flow projections

and target FSCR to mitigate

refinancing risk.

Fixed rate financing to lock in

shareholders’ return.

Floating rate financing to lower

the all-in cost.

Ability to lock in fixed rate

financing via interest / profit rate

swaps (“IRS”).

Alternatively, can be structured

with upfront drawdown to lock in

liquidity.

Progressive disbursement over

construction period to minimize

negative carry.

Flexibility of disbursement to

reduce negative carry

Faster implementation for the

initial financing as SC’s approval

is not required

STF-i Facility:

Refer to Structured Loan Syndication

column.

Senior Sukuk:

Refinancing at the end of year 5 to

eliminate construction risk for

potential rating uplift to AA2-rated

financing

Potential for higher debt-equity ratio

Page 13

12 November 2018

Equity Funding Options

Equity /

Quasi-Equity

Proposed 20% or above of the Project Cost.

Form of Issuance

Via issuance of Junior Sukuk / Loan Stocks to the shareholders of the Concessionaire (the

“Shareholders”) so that distribution to the Shareholders will not be constrained by the availability of

retained earnings.

Timing of Issuance

Back-ending the equity injection through the use of equity bridge loans or introduction of Standby Letter

of Credit (“SBLC”).

Shareholders to provide corporate guarantees to the equity bridge loans or procure SBLC (subject to

legal feedback).

Key Terms of Junior Sukuk / Loan Stocks

Subscriber(s) Shareholders based on their proportionate shareholdings of the Concessionaire

Purpose To part finance the development, construction and other costs associated of the Project, which shall be

Shariah compliant at all times

Tenor Up to 25 years

Security Unsecured

Pricing To be determined

Ranking Senor to Issuer’s ordinary shares but junior to any senior debt of the Issuer

Page 14

12 November 2018

Overview of the Outstanding Bonds/SukukBelow outlines the maturity profile of the outstanding highway Sukuk/bonds issuances:

0.51.1 1.4 1.4

1.92.7

1.9

3.42.8

6.2

1.9 1.92.4 2.1 1.8 1.9 2.1 2.2 2.5 2.4

11.5

3.2

201

8

201

9

202

0

202

1

202

2

202

3

202

4

202

5

202

6

202

7

202

8

202

9

203

0

203

1

203

2

203

3

203

4

203

5

203

6

203

7

203

8

>2

03

9

Page 15

12 November 2018

Overview of the Outstanding Bonds/SukukBelow outlines the maturity profile of the outstanding highway Sukuk/bonds issuances:

BREAKDOWN BY ISSUER

Amounts in RM mil 2018 2019 2020 2021 2022 2023 2024 to

2028

2029 to

2033

2034 to

2038

>2039 Total

Issuer

Anih 100 120 150 160 160 180 1,070 230 - - 2,170

Besraya 40 55 60 60 60 60 315 - - - 650

Cerah Sama - - 30 30 30 30 200 100 - - 420

EKVE - - - - - - 150 500 350 - 1,000

Grand Sepadu (NK) - - 60 - - 90 60 - - - 210

Jambatan Kedua - - - - - 300 2,300 1,100 - 900 4,600

Kesas 90 90 90 90 90 105 - - - - 555

Konsortium Lebuhraya Utara-Timur (KL) - - - - - - - - 180 - 180

Konsortium Lebuhraya Utara-Timur (KL) - 20 50 80 120 140 1,130 760 - - 2,300

Lebuhraya DUKE Fasa 3 - - - - - - 245 975 1,980 440 3,640

Lebuhraya Kajang Seremban 23 55 55 75 75 463 433 - - - 1,179

Lingkaran Trans Kota - 220 200 200 200 190 - - - - 1,010

Maju Expressway 50 50 50 50 50 50 100 - - - 400

MEX II - - - 30 30 40 280 740 180 - 1,300

MRCB Southern Link 80 85 95 110 110 115 250 - - - 845

PLUS (AAA) - 300 500 500 700 900 5,000 5,000 6,300 - 19,200

PLUS (GG) - - - - - - - - 11,000 - 11,000

Projek Lintasan Shah Alam - - - - - - - 130 285 - 415

Projek Lintasan Sungai Besi-Ulu Klang - - - - - - 4,200 - - - 4,200

Projek Smart Holdings 5 5 10 10 15 15 115 150 - - 325

Prolintas Expressway - - - - 256 50 194 - - - 500

Senai Desaru Expressway - - - - - - - - 40 1,850 1,890

Sistem Penyuraian Trafik KL Barat 132 128 80 - - - - - - - 340

West Coast Expressway - - - - - - 135 430 435 - 1,000

Total Principal 520 1,128 1,430 1,395 1,896 2,728 16,177 10,115 20,750 3,190 59,329

Estimated Interest Cost (5.5%) 3,263 3,234 3,172 3,094 3,017 2,913 2,763 1,873 1,317 175 24,822

Total Principal+Interest 3,783 4,362 4,602 4,489 4,913 5,641 18,940 11,988 22,067 3,365 84,150

Page 16

12 November 2018

Key Challenges for Toll Road Project to Achieve Financial Close

Key Challenges Solutions

Contractual Agreements Terms of key contractual agreements for the

Project (namely Concession Agreement (“CA”),

EPC contract and Operations & Maintenance

(“O&M”) contract) will impact the overall

bankability of the Project and ultimate financing

structure.

Both contractual arrangements and financing process

should be carried out concurrently to avoid mismatch of

risks between the Project Co and lenders/investors.

Selection of EPC

Contractor

Selection of EPC Contractor is crucial to ensure

timely Project completion within budget.

Proven technology and optimal output to

maximise economic benefits are essential to

ensure project viability.

The Company will need to perform a detailed and

stringent selection process in appointing a reliable EPC

contractor.

An independent view on the technology from a reputable

technical consultant in a manner acceptable to the

lenders.

Toll Rate Toll rates need to take into account competing toll

highways’ toll rates and impact of deferral of toll

rate hikes by the GOM

High toll rates may deter users from using the

highway.

Explore with the GOM on possible compensation from

potential drop in traffic due to deferral of toll rate hikes of

competing toll highways

Detailed market and traffic study to determine the

optimal toll rates of the Project.

Traffic Projection Traffic projections need to take into account the

wide variations between peak and non-peak hour

traffic.

Congestion at egress points in the city will reduce

traffic flow and traffic count.

Impact of Mass Rapid Transit.

Impact of future competing toll and non-toll

highways

Traffic forecasts need to be sufficiently robust and

vigorously challenged prior to commercial close to form

a realistic basis for negotiations with the GOM

Explore with the GOM on potential safety nets from the

GOM from future highways not anticipated prior to

commercial close

Page 17

12 November 2018



Environmental impact Certain financing structures may require higher

levels of compliance with regards to environmental

impact, e.g. Equator Principles

These requirements may have impact on the

project cost.

Identifying the requirements of the relevant financing

structures and addressing these environmental

requirements upfront is critical in mitigating the risk

and ensure timely financial close.

Non-Recourse Project

Financing

Non-recourse project financing via the issuance of

fixed-rate bonds will be viable subject to robustness

of project cash flow.

Subject to rating agency feedback, the typical debt

to equity ratio of 80:20 is required to achieve a

minimum rating of AA3 for a non-recourse project

financing exercise.

Negative Carrying Cost Issuance of MYR bonds on a lump sum basis will

provide certainty of funding and financing cost as

the rates will be fixed upfront at the onset of

financing but shall attract negative carrying cost.

MYR bonds with forward starts may also be

explored to achieve certainty of funding. The loan

facility on the other hand, may follow a pre-agreed

drawdown schedule based on the Project

Company’s financing requirements which shall

attract a lower negative carrying cost.

The negative carrying costs for the MYR bonds

option may be minimised through placement of the

unutilised bond proceeds in permitted instruments

or by having a combination of loans and bonds for

the required financing amount.

Fixed Rate vs. Floating

Rate Funding

Fixed rate bonds funding would allow the Project

Company to effectively manage its cash flow and

significantly reduced the risk of cash flow mismatch.

This is especially true for a toll road project, where

cash flow generation is relatively stable and can be

projected upfront with greater certainty.

With floating rate term loan funding, the Project

Company may be subjected to future interest rate

volatilities and uncertain project funding costs.

The borrower may enter into interest rate swap

transaction to exchange a floating rate payment to a

fixed payment.

Floating rate term loan also provide opportunity for

the borrower to gain should interest rates move in

their favour.

Page 18

12 November 2018



Tenure Due to the high investment outlay required for a toll

road project, long-term bond financing is usually

required especially in view of the long –term

gestation period for such projects.

Repayment to be structured on serial amortisation

basis to reduce stress on the Project’s cash flow.

Page 19

12 November 2018

Credit Rating Benchmarks

Credit Rating Agencies (“CRAs”) place great emphasis on FSCR for benchmarking purposes vis-à-vis project finance

transactions.

FSCR is calculated as the ratio of (sensitised) annual pre-financing cash flow to the sum of annual principal and interest payment

obligations. This ratio could be calculated with or without opening cash balances, as well as pre and post distribution of dividends

and subordinated payments to shareholders.

The general FSCR benchmarks for financing of highway toll concessionaires are outlined below

Rating Category DSCR / FSCR (with cash balances, post-distribution)

AAA 2.75 – 3.00 times

AA1 2.50 – 2.75 times

AA2 2.25 – 2.50 times

AA3 2.00 – 2.25 times

The FSCR matrix above provides a guidance in the covenants for the highway toll concessionaire financing that seeks a

potential upgrade in the Sukuk rating. However, any rating upgrade would also depend on the traffic volume and revenue

achieved over the initial ramp-up operational years.

In the absence of any credit enhancements, i.e., on a non-recourse project financing basis, the rating on Sukuk of new

highways is typically capped at AA3 or AA- by Malaysian rating agencies. Such financing is typically for new highways, based

on 80:20 debt-to-equity ratio, faces construction completion risks and future performance and demand risks (due to lack of

operational track record).

To enhance the rating beyond AA3/AA-, various credit enhancements would need to be considered to address the construction

completion, performance and demand risks.

Page 20

12 November 2018

Credit Enhancement Strategies

Option Description Key Considerations Precedents

Completion

Guarantee

Unconditional and

irrevocable guarantee from

project sponsor to fund any

cost overruns (up to 10% of

project cost) and any

principal and interest

payments under the

financing.

Project sponsor to recognise contingent liability

equivalent to the full amount of the Sukuk.

Construction and completion risks of the highway will be

mitigated through the completion guarantee and will not

impact the rating.

1. TNB Northern

Energy Berhad

2. Manjung Island

Energy Berhad

Cost-Overrun

Liquidity Facility

(“COLF”)

A facility procured by project

sponsor from banks to

provide buffer against any

cost overruns and shortfalls

in net operating cash flows

Procured by project sponsor from a highly rated bank as

an additional buffer against construction cost overruns

of up to 10% of total project cost.

Construction and completion risks of the highway will be

mitigated through the COLF and will not impact the

rating.

1. Jimah Energy

Ventures Sdn Bhd

Credit support in the form of guarantees and/or liquidity support facilities to address both the completion and performance risks is

required to enhance the rating of any Sukuk financing for new highways.

Credit Enhancement – Construction Completion Risks

Page 21

12 November 2018



Corporate

Guarantee

Unconditional and irrevocable

guarantee from the project

sponsor on the financing

obligations for the entire tenor of

the Sukuk

Sukuk rating will mirror the project sponsor’s

corporate rating as investors are effectively

investing against the project sponsor’s credit

profile.

Operational risks of the plant will not impact the

rating.


equivalent to the full outstanding amount of the

Sukuk.

Accelerated payment of obligations under the

Sukuk financing in the event of a default.

1. Manjung Island

Energy Berhad

Rolling Guarantee Rolling, unconditional and

irrevocable guarantee from the

project sponsor to meet the next 6

months’ financing obligations

throughout the tenor of the Sukuk


equivalent to only the next 6 months’ financing

obligations.

No acceleration of Sukuk obligations – project

sponsor continue to meet cash flow shortfalls

throughout the tenor of the Sukuk.

Project sponsor are committed to provide full,

long-term support via the rolling guarantee,

instead of fully leveraging on the operational

performance and cash flows of the highway.

1. TNB Northern

Energy Berhad



Credit Enhancement – Performance and Demand Risks

Page 22

12 November 2018



External Guarantee Unconditional and irrevocable

guarantee from guarantors such

as Danajamin on financing

obligations.

Sukuk rating will mirror the rating of the guarantor,

be it Danajamin or any financial institution

providing the guarantee.

A guarantee/facility fee will be charged by

Danajamin or the financial institution.

1. West Coast

Expressway

2. Sasaran Etika



Credit Enhancement – Performance and Demand Risks

Page 23

12 November 2018

Case Studies

Page 24

12 November 2018

Thank You

Documents

New Private Financing of Toll Road - Lembaga Lebuhraya Malaysia 2 _KKR-LLM 12 Nov by... · 2018. 11. 13. · Private Financing of Toll Road Strictly Private & Confidential 12 November