Malaysian toll road borrower MEX I Capital achieved a turnaround that resolved corporate governance issues, improved investor protection and restored trust with sukuk holders.
Trouble started brewing at the issuer, then known as Bright Focus, in February 2016 over unexpected fund transfers to holding company Maju Holdings. The cashflow issues continued until June 2019 when RAM, alarmed at a severe impairment on Bright Focus’ debt-servicing metrics and eroded cash balances at the operating company Maju Expressway, downgraded the sukuk to BB1.
With questions over its corporate governance and possible default hanging over it, Bright Focus began restructuring efforts with financial adviser New Paradigm Capital Markets.
The plan was for a like-for-like swap into new M$1.126bn (US$256m) senior sukuk. In return for a maturity extension, the new facilities incorporated tighter covenants that would address the shortcomings that had enabled the borrower to make transfers of funds that at times breached minimum amounts needed in the financial service and reserve accounts.
Renamed MEX I Capital, the issuer faced a legal suit from angry sukuk holders bent on recovering the funds and averse to any haircut or lower coupons.
Another complication was the musharaka structure in the old sukuk deal. Essentially, the musharaka concept calls for unpaid profit distributions to be forgiven, but sukuk holders were vehemently opposed to doing so. Ultimately, the issuer and its adviser sought approval from the Securities Commission Malaysia’s sharia advisory council for a solution – the capitalisation of unpaid distributions in the new sukuk.
The council's blessings came through in December 2021 and the turnaround exercise was completed on January 21 2022.
The new sukuk’s terms closed a loophole for fund transfers by banning Maju Expressway and MEX I Capital from making distributions or taking on new debt. MEX I Capital’s revenue and compensation accounts are now jointly managed by the security agent and Maju Expressway, providing better oversight. Any annual expenses exceeding 5% of pre-set levels will need a review from an independent project certifier, and two out of three directors of MEX I Capital and MESB are now independent and approved by the sukuk holders.
RAM rated the restructured senior sukuk A2, a 13-notch improvement from the old notes. The new M$1.126bn deal comprised 16 tranches with extended maturities from 2024 to 2039. All the tranches have step-up coupons starting from 2.6% in 2022 and climbing to 9.5% for the 2039s. The step-ups resulted in yields to maturities for the respective tranches that stayed unchanged from those in the old sukuk.
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