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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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
Some Key Financial Issues of Toll Road Project
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.
Shareholders undertaking for cost
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
Shareholders undertaking for cost
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
Key Challenges for Toll Road Project to Achieve Financial Close
Key Challenges Solutions
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
Key Challenges for Toll Road Project to Achieve Financial Close
Key Challenges Solutions
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
Credit Enhancement Strategies
Option Description Key Considerations Precedents
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.
Project sponsor to recognise contingent liability
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
Project sponsor to recognise contingent liability
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 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 – Performance and Demand Risks
Page 22
12 November 2018
Credit Enhancement Strategies
Option Description Key Considerations Precedents
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 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 – Performance and Demand Risks
Page 23
12 November 2018
Case Studies
Page 24
12 November 2018
Thank You