Bright Focus Bhd downgraded to BB1 on Covenant Breach

On June 3, 2019, Bright Focus Berhad’s RM 1.35 billion Sukuk Musharakah (2014/2031) rating was downgraded from A1 to BB1 with a negative outlook due to a breach of covenant. This is the second-round downgrade by RAM Rating after the first one in November 2018 which the rating was first downgraded from AA2 to A1 over the same issue (Read the rating announcement here).

Bright Focus Bhd is one of a few companies under Maju Holdings Sdn Bhd and it also owns 96.8% subsidiary of Maju Expressway Sdn Bhd (MESB). Through this subsidiary, Bright Focus holds the concession for the 26km Maju Expressway (MEX), which is in turn, the sole source of the sukuk’s repayment.
 
Under the sukuk’s negative covenant (Click here, page 42), it states that “save and except for payments or repayments of loans and/or advances granted or to be granted by the Issuer to MESB,MESB shall not make any payments (whether in relation to principal, profit, mark-up or otherwise) to its directors, related corporations or associated companies in connection with any loans or advances from its directors, related corporations or associated companies;”.  Negative covenant is an agreement where the issuer promise to not do the prohibited things as listed throughout the tenure of the bond or sukuk (Read more about bond and sukuk covenant here).

Maju Expressway Sdn Bhd infringes this agreement when they made unanticipated advances to its parent company, Maju Holdings Sdn Bhd. The first advances were paid in June 2018 for RM 73 million, and then another advances of up to RM 24.82 million were paid between September and November 2018. According to RAM Ratings, this advances payment has caused severe depletion of MESB’s cash balances which impacts its debt-servicing capacity.
 
In light of this covenant breach, the sukuk holders which consist of prominent financial institutions such as Malayan Banking Bhd, Nomura Asset Management and KAF filed a lawsuit via the trustee against Tan Sri Abu Sahid Mohamed, the executive chairman and ultimate shareholder of Maju Holdings Sdn Bhd. On 24 May 2019, a letter of demand was sent to MESB, requiring the company to return all prohibited advances to date and to reinstate its cash position within the next 30 days.
 
In addition to the covenant breach, RAM Ratings also expressed its concern on the uncertainty of the MESB’s annual cash flow. The company’s revenue is sensitive to the Government of Malaysia’s (GoM) decisions on toll rate movements. In addition, its compensation receipts are constrained by the projected traffic volume under its concession agreement, and it remains vulnerable to escalating operational costs. A delay in MESB’s toll rate hike to 2021 (from RAM’s previous assumption of 2020) would reduce its projected revenue by RM39 mil in 2020. Bright Focus and MESB are also likely to incur unexpected tax expenses in 2019, following a query from the Inland Revenue Board (IRB) under the latter’s Special Programme for Voluntary Disclosure.
 
 
However, as of 12 July 19, the legal suit is pending as Bright Focus Sdn Bhd is taking a step to restructure the sukuk. The company emphasized that the revamped sukuk will have a better debt-service ratio, highlight of its governance issue and verification of expenses by a third-party quantity surveyor and other relevant consultants.
 
Ever since the rating downgrade was first announced, the trading activities for BFB IMTN 2.500% 24.01.2030 has pushed its yield from 5.18% in July 2018 to 6.99% on its last trading activity in February 2019. There are other issuances by the Bright Focus Bhd as listed here.

Source: RAM Rating Service Berhad, The Star Online 
 

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