RAM Ratings assigns preliminary AAA(bg)/P1 ratings to Adventa’s proposed debt issues

RAM Ratings has assigned preliminary enhanced ratings of P1 and AAA(bg) to Adventa Berhad’s (Adventa or the Group) proposed RM150 million Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) Programme (2011/2018); the long-term rating has a stable outlook.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD’S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

http://www.marc.com.my/ratbase/pub.press.detail.php?aid=3960

RAM Ratings downgrades rating of SESCO's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has downgraded the rating of Syarikat SESCO Berhad’s (SESCO) RM605 million Al-Bai Bithaman Ajil Islamic Debt Securities (2001/2012), from AAA to AA1; the long-term rating has a stable outlook. SESCO is the exclusive provider of electricity and sole off-taker of all the generating capacity in Sarawak.

The rating downgrade reflects the weaker financial profile of SESCO arising from the heavier capacity-payment obligations anticipated via power purchase agreements for the new and sizeable power plants under the Sarawak Corridor of Renewable Energy (or SCORE). The sizeable new power-generating capacity will also increase demand risk for SESCO and its holding company, Sarawak Energy Berhad (SEB). As an investment-holding company, SEB relies on residual cashflow from its subsidiaries, particularly SESCO (its utility arm), to support its heftier debt load. On this account, the credit profiles of the 2 entities are viewed to be closely linked. For further details on SEB, please refer to our press release on 24 May 2011, entitled RAM Ratings assigns preliminary AA1 rating to Sarawak Energy’s proposed RM15 billion sukuk.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD'S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC (May 25, 2011): MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

www.marc.com.my

RAM Ratings reaffirms Prai Power's AA3 rating

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA3 rating of Prai Power Sdn Bhd’s (Prai Power or the Company) RM780 million Al-Istisna Fixed-Rate Serial Bonds (Bonds), with a stable outlook. Prai Power is an independent power plant (IPP) that owns and operates a 350-MW combined cycle, gas-turbine power plant in Prai, Penang (the Plant).

The rating remains supported by Prai Power’s strong business profile, underscored by the favourable terms of its power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). For the period under review, the Company was able to claim 99.2% of its available capacity payments (ACPs) and fully pass through its fuel costs to TNB.

Nonetheless, Prai Power has utilised much of its allowance for scheduled maintenance permitted under the PPA during the first (2009) and second (2010) years of its third 3-year availability target (AT) block ending 31 December 2011. Given this, it remains a challenge for the Company to meet the AT requirement for the current AT block; should there be a breach, the Company would have to pay penalties to TNB. Meanwhile, the Plant underwent more unscheduled maintenance in 2010. Based on RAM Ratings’ sensitivity tests, however, Prai Power’s debt-servicing ability is envisaged to remain intact, with a minimum financial service coverage ratio of 1.50 times (with cash balances, post-distribution) on principal repayment dates. Our sensitised cashflow assumes that the Company will adhere to its financial covenants throughout the Bonds’ tenure (i.e. on a forward-looking basis as opposed to only the year).

Meanwhile, the single-shaft design of the Plant is an inherent technological limitation for Prai Power as the entire facility would have to be shut down should it experience any disruption to any component attached to the generator. The compensation from its operation and maintenance service provider - capped at RM9 million - and insurance against revenue losses, while in place, may not be sufficient to cover the Plant’s revenue losses should it experience lengthy unscheduled outages, as was the case in 2006. While the losses in ACPs so far have not dented Prai Power’s financial profile, we note that its debt-servicing ability may be affected by the recurrence of lengthy unscheduled outages. In addition, the rating remains moderated by regulatory and single-project risks, similar to all other IPPs.

www.ram.com.my

Bond Market Performance 24 May 2010 - 24 May 2011

The one year performance (24 May 2010 - 24 May 2011) of the Conventional bonds versus the Islamic sukuk in the Malaysian bond market using the BPA Malaysia FiiX Bond Index Series.

Double click on the image to enlarge.

Based on the graph, the sukuk market outperforms the conventional bond market.

See: www.bpam.com.my

RAM Ratings reaffirms AA1 rating of GB3's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA1 rating of GB3 Sdn Bhd’s (GB3 or the Company) RM850 million Senior Secured Al-Bai Bithaman Ajil Bond Facility (ABBA Bonds), with a stable outlook. GB3 is an independent power producer (IPP) operating a 640-MW combined-cycle, gas-turbine power plant (the Plant) in Lumut, Perak.

The rating remains supported by GB3’s strong business profile, underscored by the favourable terms of its Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB). Similar to all other IPPs, however, the rating is moderated by regulatory and single-project risks.

In 2010, GB3 incurred available capacity payments (ACPs) loss of RM5.70 million, as its unscheduled outage rate (calculated based on a 365-day rolling average) exceeded the PPA limits following an incident involving one of its transformers in May 2009. However, there had been no material financial impact on the Company as such ACP losses and penalties had been largely compensated by both the insurer and the IPP’s operations and maintenance (O&M) service provider.

Meanwhile, we note that it may be challenging for GB3 to meet the requirement on its 3-year availability target (“AT”) due to the tight average AT of 91.53% projected for the third 3-year AT block (2009 to 2011) versus the PPA limit of 91.50%, which leaves little room for variations. Nonetheless, some comfort can be derived from the liquidated damages up to RM4 million claimable under its O&M Agreement.

Based on a stressed scenario, GB3’s minimum and average finance service cover ratios (FSCRs) (with cash balances, post-distribution) on principal repayment dates are projected to come in at 1.25 times and 1.51 times, respectively. RAM Ratings assumes that the Company will adhere to its financial covenants throughout the ABBA Bonds’ tenure (i.e. on a forward-looking basis). Such financial covenants include compliance with its finance service reserve account requirement, a post-distribution FSCR of 1.25 times and a debt-to-equity ratio of 90:10. Notably, the minimum covenanted FSCR is less stringent than those of the other AA-rated IPPs in RAM Ratings’ portfolio. All said, GB3's debt-servicing ability has remained strong to date, with its FSCR (with cash balances, post-distribution) hovering around 1.89 to 2.71 times over the past 5 years.

Full report: www.ram.com.my

RAM Ratings reaffirms TNB's AAA debt rating

RAM Ratings (20 May 2011): RAM Ratings has reaffirmed the AAA rating of Tenaga Nasional Berhad’s (TNB or the Group) USD500 million equivalent Murabahah Medium-Term Notes Programme (2005/2025); the long-term rating has a stable outlook.

The rating reflects TNB’s position as Malaysia’s national electricity company, with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah. TNB also plays a crucial role as the sole-off-taker for the generating capacity and electrical energy produced by all the independent power producers (IPPs) in Peninsular Malaysia. Meanwhile, the Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia’s generating capacity despite the growing presence of IPPs in the past decade.

In view of the strategic nature of TNB’s role as Malaysia’s national electricity company, it enjoys strong implicit support from the Government, i.e. its major shareholder. Previous tariff reviews - which had helped the utility giant pass on its rising coal costs to consumers - and subsidised gas prices underline the implicit support received by TNB.

As at end-August 2010, TNB’s balance sheet was weighed down by its hefty RM21.26 billion debt burden. As half of this was denominated in Japanese yen and US dollars, the Group is exposed to fluctuations in foreign-exchange (forex) rates. Nonetheless, we recognise the improvement in TNB’s key financial metrics after the Group trimmed its debt level from nearly RM30 billion 5 years ago; as at end-August 2010, its gearing ratio had eased to 0.74 times. After including its heavy debt load from the fixed capacity-payment obligations under the Group’s Power Purchase Agreements (PPAs) with the various IPPs, its adjusted gearing ratio climbed up to 1.74 times while its adjusted funds from operations debt coverage stood at 0.23 times as at end-August 2010.

Given the increasing dependence on coal-powered generation – which accounted for 40.2% of Peninsular Malaysia’s generation mix in FY Aug 2010 compared to 28.6% the previous corresponding period – TNB remains vulnerable to unfavourable movements in coal prices and forex rates, as supply is procured at international prices. As coal costs already represent more than half of its total fuel costs and in view of still-rising coal prices, the Group’s margins will face further downward pressure. Nevertheless, the impact of heftier generation costs may be moderated by the stronger ringgit against the US dollar.

Full article: www.ram.com.my

Key thrusts to develop Malaysia as an Islamic Financial Hub

Malaysia is a small country. With just over 26 million people and categorized as a “developing” nation, we must get our strategy correct as we may not be given the chance to start over if we miss the boat. After being involved in this industry for the last 19 years, in my humble opinion, these are the comparative advantage that we need to leverage on.

Impressive Human Capital

Without doubt, Malaysia has produced some of the best minds in Islamic finance. The experienced gained from the very vibrant Islamic finance market within Malaysia has been instrumental in building the skill sets as well as interest in the industry. In this context, I am referring to the professional human capital and not just the management class. Financial engineering, risk management, Syariah and legal are key components for a successful Islamic finance market and Malaysians are at the forefront in all these fields. In fact, Malaysia has been exported experts on these fields all over the world.

Vibrant Capital Raising Conduits

Malaysia has many capital raising conduits for Islamic Finance. From multinationals all the way down to the individual consumer, the ability to raise financing is very easy in Malaysia. The Sukuk market is very active and the numerous Islamic banks also help in the reallocation of capital to those that need them. The various options available to get capital are an important component that has helped the country to grow.

Ample Liquidity to Meet Demand

Malaysia has ample liquidity due to the high saving nature of the populace. Demand for capital has been met by overwhelming response by investors. The availability of numerous Islamic financial institutions that are able to aggregate savings makes Malaysia as a favorite destination to issue capital. Many multinationals have done so via the Sukuk market.

Transparent Legal and Regulatory Regime

The laws and regulatory regimes in Malaysia are second to none. The symbiotic existence of the Islamic finance laws with the English Common law makes Malaysia a very safe destination for all stakeholders as their rights are easily known and any disputes can be litigated using transparent rules.

Free Flow of Information

It is easy for financial information to be obtained in Malaysia. From trading data up to legal documents, users can easy access it. Everyone can make an informed decision based on the information available. Compared to other countries in the world, Malaysia is one of the top in terms of getting financial information.


We only need to focus on this four items and we can place Malaysia on the map.

MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s Senior Class A Sukuk Ijarah MTN

MARC (May 18, 2011): MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s (DRIRM) Senior Class A Sukuk Ijarah Medium Term Notes (MTN) from MARCWatch Negative pending the forthcoming June 2011 redemption of the remaining outstanding RM40 million principal amount of the MTNs. DRIRM will redeem the notes with cash from its Debt Service Reserve Account (DSRA) which is sufficiently funded for the purpose.

However, MARC continues to maintain its AA-IS rating on DRIRM’s RM160 million Class B Sukuk Ijarah MTN on MARCWatch Negative pending noteholders’ approval to convert the notes into non-publicly traded notes.

MARC expects to withdraw its rating on the Class B Sukuk upon receipt of notice of request for rating withdrawal from the issuer and confirmation that the aforementioned consent has been obtained.

Full report: www.marc.com.my

Special Power Vehicle's bondholders waive rating requirement

RAM Ratings (18 May 2011): RAM Ratings has received confirmation that the bondholders of Special Power Vehicle Berhad’s (SPV or the Company) RM215 million Class B Islamic Medium-Term Notes Facility (2005/2034) (Class B IMTN) have approved the resolution to withdraw its rating. As such, RAM Ratings has – at the request of SPV - withdrawn the C1 rating of the Class B IMTN and no longer has any rating obligation on the debt facility.

Meanwhile, the rating of SPV’s RM800 million Class A Islamic Medium-Term Notes Facility (2005/2022) remains at A1, with a stable outlook. SPV is a special-purpose vehicle set up as a funding conduit to raise the funds required for the development of Jimah Energy Ventures Sdn Bhd’s coal-fired power plant in Port Dickson, Negri Sembilan.

Full report: www.ram.com.my

RAM Ratings revises KLBK's rating outlook to stable, reaffirms AA3 debt rating

RAM Ratings (16 May 2011): RAM Ratings has reaffirmed the AA3 rating of Konsortium Lebuhraya Butterworth-Kulim (KLBK) Sdn Bhd’s (KLBK or the Company) RM247 million Secured Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS). At the same time, the outlook on the rating has been revised from positive to stable. KLBK is the toll concessionaire for the 17-km Butterworth-Kulim Expressway (BKE or the Expressway).

The revision of the rating outlook is based on the fluidity of the ongoing negotiations between PLUS Expressways Berhad (PEB) and the Government, with regard to the concession agreement(s) that will supplement/replace all the existing ones governing the 4 domestic tolled roads under the PEB Group, including the BKE. RAM Ratings opines that the uncertainty arising from the ongoing discussions and the possibility of protracted negotiations preclude any upward rating action in the near term.

Meanwhile, the rating of the BaIDS remains supported by the BKE’s healthy and proven track record on traffic volume as well as its robust debt-servicing ability, along with the expectation that these will stay commendable.

In 2010, the BKE achieved its best growth rate in average daily traffic for the past decade. On average, 62,704 vehicles plied the Expressway daily last year, translating into a robust 8.90% year-on-year improvement (2009: +4.30%). Penang’s resuscitated economy, heightened economic activity within the Kulim Hi-Tech Park and the progressive development of residential areas along the BKE had contributed to the commendable performance. Going forward, the BKE is envisaged to exhibit healthy single-digit traffic growth, supported by the aforementioned factors.

We note that KLBK’s debt-protection measures remain intact, with strong finance service cover ratios (FSCRs) of 1.63 times (without cash balances) and 5.26 times (with cash balances, post-distribution) as at end-2010. Looking ahead, the Company is expected to register a minimum FSCR of 2.50 times (with cash balances, post-distribution) on principal repayment dates. In assessing KLBK’s ongoing annual distributions to its shareholders, RAM Ratings’ sensitised cashflow assumes that the Company will adhere to its financial covenants throughout the tenure of the BaIDS (i.e. on a forward-looking basis) as opposed to only the year of assessment. Such covenants include compliance with the aforesaid post-distribution FSCR and a debt-to-equity ratio of at least 70:30.

In the meantime, the rating remains moderated by regulatory risk that is inherent in all tolled-road projects, apart from single-project risk.

Full article: www.ram.com.my 

MARC downgraded ratings on the RM335 million Super Senior B and RM190 million Senior primary CLO bonds by Prima Uno Berhad

MARC (Apr 12, 2011) - MARC has downgraded its ratings on the RM335 million Super Senior B and RM190 million Senior primary collateralised loan obligation bonds issued by Prima Uno Berhad (Prima Uno) to A- and C from AA+ and BB respectively. At the same time, MARC affirms the ratings of the remaining classes at AAA for the RM290 million Super Senior A bonds and C for both the RM40 million Mezzanine and RM95 million Subordinated bonds. The rating outlook on the Super Senior A, Super Senior B and Senior bonds remains negative.

The lowered ratings reflect continued deterioration in collateralisation ratios and credit quality of the loan portfolio as well as reduced tolerance to further loan defaults from obligors with weak liquidity positions. Since the last review in August 2010, five obligors have been downgraded, out of which two were downgraded to D upon failure to meet interest payments on January 21, 2011, bringing the total number of defaulted obligors to 10. As of March 10, 2011, the loan portfolio comprises 22 performing corporate loans of RM614.0 million, down from RM740.0 million as at July 26, 2010; one obligor has prepaid its entire RM20.0 million loan. The reduced loan portfolio has resulted in lower collateralisation ratios of 107.5%, 80.7% and 76.7% for the Super Senior B, Senior and Mezzanine bonds respectively (last review: 118.4%, 90.8% and 86.5% respectively). MARC believes that recovery prospects on the defaulted loans are poor based on the credit profiles of the defaulted obligors and continues to assume zero recovery of principal outstanding. Additionally, the agency views the collectibility of loans subject to mandatory prepayment as uncertain. The number of obligors downgraded below the BBB threshold stood at 13 as at March 10, 2011, affecting a total of RM323.0 million of loans.

Meanwhile, the affirmed rating on the Super Senior A bonds reflects a strong collateralisation ratio of 260.2%, and the bonds’ ability to withstand loan defaults in a MARC ‘AAA’ stressed scenario.

Further supporting the bonds are RM45.1 million of balances in the Liquidity Reserve Account (LRA) as at March 10, 2011, following RM72.3 million in prepayments from six obligors on January 26, 2011. An extraordinary resolution was passed on December 6, 2010 allowing obligors to make partial or full prepayment of outstanding loans under the loan portfolio. The bulk of the prepayments were used to redeem RM54.1 million in Super Senior A bonds, leaving outstanding bonds at RM235.9 million. The funds in the LRA are sufficient to cover at least the coupon payments on the CLO bonds for the remaining two payment dates up to maturity on January 26, 2012.

As at March 10, 2011, the portfolio’s weighted average rating (WAR) factor improved to 9.99 (A-/BBB+), from 15.1 (BBB) with the exclusion of the two most recent defaulted obligors from the WAR computation. Based on the WAR and projected tenure-adjusted default rates, MARC’s cash flow sensitivity results continue to show that while Super Senior A and Super Senior B bonds can still withstand a ‘AAA’ stress scenario, the Senior and Mezzanine bonds are exposed to a very high likelihood of default at maturity. The Super Senior A bonds are able to withstand about six more obligor defaults of RM40 million each before failing to meet its minimum required collateralisation ratio of 150%. However, the Super Senior B bonds can only withstand two obligor defaults before principal impairment occurs.

The negative rating outlook on the corresponding bonds reflects MARC’s expectations of further downward obligor rating migration as MARC foresees continued pressure on the credit quality of lower-rated performing obligors.

Full article: www.marc.com.my

RAM Ratings assigns preliminary A3 rating to Bank Muamalat's proposed sukuk, reaffirms A2/P1 financial institution ratings

RAM Ratings (09 May 2011): RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (Bank Muamalat or the Bank) respective long- and short-term financial institution ratings at A2 and P1; the rating of the Bank’s RM250 million Islamic Subordinated Bonds (2006/2016) has also been reaffirmed at A3. Concurrently, RAM Ratings has assigned a preliminary long-term rating of A3 to the Bank’s Proposed Islamic Subordinated Sukuk Programme of up to RM400 million (Proposed Subordinated Sukuk). All the long-term ratings have a stable outlook. The 1-notch difference between Bank Muamalat’s A2 long-term financial institution rating and the A3 ratings of its Proposed Subordinated Sukuk and RM250 million Islamic Subordinated Bonds reflects the subordination of the debt facilities to the Bank’s senior unsecured obligations.

Bank Muamalat’s credit fundamentals remained intact during the period under review. In April 2010, the Bank adopted Financial Reporting Standard 139 on recognition criteria for impaired financing. As at end-December 2010, its gross impaired-financing ratio worked out to 5.2% (restated ratio as at end-March 2010: 8.0%) after having written off RM263.1 million of impaired financing. Though still weaker than the industry average of 3.3% as at the same date, RAM Ratings acknowledges the gradual improvement in the Bank’s asset quality since the new management team had been installed in late 2008. Its financing delinquency ratio, in particular, had ameliorated from 9.5% as at end-March 2010 to 7.9% as at end-December 2010. Nonetheless, we opine that more time is needed for the seasoning of its new financing portfolio given that the management only commenced the Bank’s new credit-risk-management infrastructure and processes towards the end of 2009.

RAM Ratings perceives the Bank to have a small presence relative to its peers, with about a 1%-share of the market’s outstanding financing and deposits. On this note, the Bank is embarking on its growth strategies as part of its transformation plan to attain a larger market share in the competitive consumer and corporate-banking segments. In 9M FY Mar 2011, Bank Muamalat recorded a stronger pre-tax profit of RM143.7 million (9M FY Mar 2010: RM106.9 million), largely anchored by lower financing-loss provisions. Going forward, RAM Ratings expects the Bank’s credit costs to moderate as a more rigorous credit-risk-management infrastructure has been installed to ensure stricter financing origination while efforts to clean up legacy troubled credits are almost completed.

While the management has been gradually rebalancing the Bank’s securities portfolio with a greater concentration of government securities and higher-rated debt papers, Bank Muamalat is still exposed to some private debt securities (PDS) that may have a negative impact on its future earnings, in the form of future impairment provisions. Its PDS holdings meanwhile had decreased from about 68% of its securities portfolio as at end-March 2010 to 53% as at end-December 2010. RAM Ratings understands that the gradual selling down of the Bank’s PDS portfolio is expected to continue this year and is in line with its plan to only hold such investments for the short- to medium-term.

Notably, Bank Muamalat has enjoyed strong support from its shareholders, as evinced by RM500 million of capital injections from DRB-HICOM Berhad (DRB-HICOM) and Khazanah National Berhad (Khazanah) in March 2009. As a result, the Bank’s Tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) came up to 14.3% and 18.4%, respectively, as at end-December 2010. The Bank plans to raise up to RM400 million from its Proposed Subordinated Sukuk in FY Mar 2012, to boost its capitalisation; this will lift its pro forma RWCAR to 19.6%, based on its risk-weighted assets as at end-December 2010.

Meanwhile, we note that Bank Muamalat has a high level of depositor-concentration risk; its top 20 depositors accounted for about 45% of its total customer deposits as at end-December 2010. Nevertheless, the Bank’s long-standing relationships with its depositors help to maintain the stability of its deposit base. The Bank is also making efforts to diversify its depositor base to reduce over-reliance on funding from large depositors. On a more positive note, Bank Muamalat maintains a very liquid balance sheet, with a liquid-asset ratio of 61.0% as at the same date - thus mitigating its depositor-concentration risk.

On 22 April 2011, DRB-HICOM announced its acquisition of a 32.2% stake in Pos Malaysia Berhad (Pos Malaysia) from Khazanah which is expected to be completed by end-June 2011. Upon completion of the acquisition, DRB-HICOM will replace Khazanah as the single largest shareholder of Pos Malaysia. RAM Ratings will monitor for any potential impact to Bank Muamalat and re-assess the rating, if necessary.

Full article: http://www.ram.com.my

RAM Ratings places EON Bank on Rating Watch with a positive outlook

RAM Ratings (6 May 2011): RAM Ratings has placed EON Bank Berhad’s (EON Bank or the Bank) A1/P1 long- and short-term financial institution ratings, on Rating Watch, with a positive outlook. Concurrently, we have also placed the respective A3 and A2 long-term ratings of the Bank’s Innovative Tier-1 Capital Securities Issuance Programme (Tier-1 Capital Securities) of up to RM1 billion and Subordinated Medium-Term Notes (Sub MTN) Issuance Programme of up to RM2 billion on Rating Watch, with a positive outlook.

On 29 April 2011, EON Capital Berhad (EON Capital), announced to Bursa Malaysia that it had on 28 April 2011 accepted the offer made by Hong Leong Bank Berhad (Hong Leong Bank) to acquire the assets and liabilities of EON Capital for approximately RM5.1 billion. EON Bank is the core subsidiary of EON Capital.

The Rating Watch is premised on the proposed acquisition of all the assets and liabilities of EON Capital by Hong Leong Bank. Upon completion of the proposed acquisition, the ratings of EON Bank’s debt facilities will be upgraded to reflect Hong Leong Bank’s credit as the obligations of the former will be assumed by Hong Leong Bank, while EON Bank’s financial institution ratings are likely to be withdrawn. The financial institution ratings of Hong Leong Bank had been reaffirmed at AA1/P1 with a stable outlook on 29 April 2011.

Full detail: http://www.ram.com.my/

Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent

Full article: http://www.bnm.gov.my/index.php?ch=8&pg=14&ac=2253

Bank Negara Malaysia (5 May 2011): At the Monetary Policy Committee (MPC) meeting today, Bank Negara Malaysia decided to raise the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent. The floor and ceiling rates of the corridor for the OPR are correspondingly raised to 2.75 percent and 3.25 percent respectively.

The global economic recovery has continued in the first quarter of the year, but the growth has been highly uneven across regions. Growth in the advanced economies during this period has remained modest. In the region, despite some moderation, the growth has remained strong, supported by robust domestic economic activity. Global inflation has, however, increased on account of rising energy and commodity prices. In several countries, further upward pressure on inflation has been exerted by domestic demand conditions. Although the global recovery is expected to continue going forward, downside risks have increased, arising from the potential for higher energy and commodity prices, possible supply disruptions following developments in Japan, and the heightened volatility in capital flows to emerging economies.

In the domestic economy, the latest indicators point towards the continued strengthening of private investment and sustained private consumption expenditure in the first quarter. The export performance also improved, supported by regional demand. Going forward, the assessment is for the Malaysian economy to remain firmly on a steady growth path, with growth improving gradually during the course of the year. Growth will be underpinned by the firm expansion of domestic demand. Sustained employment conditions and income growth is expected to provide support to private consumption, while private investment is projected to strengthen amidst the improved investment environment. The developments in Japan are expected to have a limited impact on the overall domestic economy. Positive prospects for the region and strong demand for commodities are expected to continue to support the Malaysian economy.

Domestic headline inflation has continued to increase, rising to 3% in March to average 2.8% for the first quarter of 2011. The increase was mainly due to higher food and fuel prices. The assessment is that supply factors will continue to be a key determinant affecting consumer prices. Global commodity and energy prices are projected to remain elevated during the year, with inflation in major trading partners also expected to rise further. There are also some signs that domestic demand factors could exert upward pressure on prices in the second half of the year.

With the economy firmly on a steady growth path, the MPC decided to adjust the degree of monetary accommodation. At the current OPR level, the stance of monetary policy remains supportive of growth. The future stance of monetary policy will depend on the assessment of the risk to growth and inflation prospects.

BPA Malaysia Ringgit Bond Index overview as at end of April 2011

A rating action affecting the water industry had a major impact on the performance of the corporate bond and sukuk groups. The downgrade by MARC on 6th April 2011 of most of the water utility players caused a drop in value of RM1.052 billion from the market. Despite the sharp drop in the corporate market, the Government bond market rallied.

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Briefing Session on Bond and Sukuk Valuation for MASB members - 3 May 2011

Today, BPA Malaysia organised a forum in collaboration with the Malaysian Accounting Standard Board members attended by more than 49 people. It was a first time that we had the chance to meet up with the accounting fraternity.

The agenda for the function are as follows:

9.00AM – 9.30AM Registration (to be handled by MASB)
9.30AM – 9.35AM Opening address by Meor Amri Meor Ayob, CEO, BPA Malaysia
9.35AM – 10.00AM Introduction to Bond Pricing Agency Malaysia by Mohd Shaharul, Chief Business Officer
10.00AM – 10.30AM Coffee Break (on Level 5 RAM Training Cafeteria)
10.30AM – 11.30AM Pricing Methodology by Simon Ng, Chief Pricing Officer
11.30AM – 12.00PM Q&A Session

Below is an excert of my opening speech:


"Good morning ladies and gentlemen.


Welcome to this event organized by Bond Pricing Agency Malaysia with collaboration with MASB. Personally and well as on behalf of the company, I would to extent my appreciation to each and every one of you for being here today.


BPA Malaysia is a creature of regulation. We are under the securities commission under the Bond Pricing Agency Guidelines. When we were established back in 2004, it took 2 full years before we were recognized by the SC as a BPA after stringent assessment of our systems, methods and people. The authorities even allowed the industry affected by the BPA concept to have a say on us.


Although we passed this rite of passage, I always remind myself and my team not to be complacent. We have never taken this stamp of approval by SC for granted. Instead, our corporate tune has always been on winning trust. Since establishment, we have always engaged all the stakeholders to not only bring our massage across but also to listen to comments, suggestions and criticism. We would like to work with everyone and see whether we can help make their work easier."