Thursday, June 30, 2011
Published on 30 June 2011
RAM Ratings has reaffirmed the respective AAA and AA2 ratings of Premium Commerce Berhad’s (PCB) RM211 million Class A and Class B Notes Series 2010-A (collectively, Notes Series 2010-A), with a stable outlook. As at 4 May 2011, RM163 million of the Class A and Class B Notes remained outstanding.
This transaction involves the securitisation of automobile hire-purchase (HP) receivables from Tan Chong & Sons Motor Company Sdn Bhd (TCSM) and TC Capital Resources Sdn Bhd (TC Cap) under PCB’s RM2 billion Medium-Term Notes (MTN) Programme.
The reaffirmation of Notes Series 2010-A’s ratings reflects the available credit enhancement provided by the overcollateralisation (OC) ratios supported by the HP receivables securitised under Note Series 2010-A. The OC ratios for the Class A and Class B Notes stand at a respective 12.45% and 8.32%. While the current OC ratios amply support even higher levels of stress for the Class B Notes, they are required given the higher-than-expected default levels observed in the most recent static-pool data in 4Q 2010. RAM Ratings will continue monitoring the portfolio’s performance to ascertain that default and prepayment levels remain stable, without diluting the available credit enhancement.
The average monthly net default rate in recent months has averaged at 0.01% (based on the initial HP principal balance) - well within our monthly ramp-up default assumption of 0.03%. Meanwhile, the average monthly prepayment rate stands at 0.25% - lower than our monthly high-prepayment-rate assumption of 1.25% but lower than the low-prepayment-rate assumption of 0.30%. Given the 25-basis-point increase in the overnight policy rate in May 2011 and expectations of further rate hikes in 2H 2011, we do not envisage prepayments to rise as any spike in interest rates will reduce borrowers’ incentive to refinance.
Meanwhile, the ratings are also supported by the transaction’s legal and payment structures. This mainly involves the pass-through mechanism that allows any collections - after meeting senior expenses and coupon obligations - to be deployed for early redemption of the Notes on each quarterly coupon-payment date, in the pre-determined order of priority. This partially addresses the negative carry of the Notes Series due to low investment returns.
RAM Ratings notes that TC Cap's capacity to manage a rapidly expanding loan portfolio remains a moderating factor for the transaction. The challenge in managing a growing loan portfolio may had in turn affected the underlying HP receivables as well as the efficacy of the Servicer’s collection and monitoring procedures. We have factored this risk in to our cashflow assessment, having revised our default assumption in November 2010. Nonetheless, we note that TC Cap has made some effort to improve its operations, such as upgrading its information-technology system and strengthening its human-capital base. At the same time, TC Cap has also improved the credit quality of its loans by tightening its internal credit-assessment guidelines, particularly on loan applications for the purchase of "mass market" car models. Since the changes, we have observed lower default rates in the latest 2009 static pool.
As at 30 April 2011, the HP receivables in the portfolio comprised 3,586 HP contracts, with an outstanding principal balance of RM168.40 million. These loans had a weighted-average seasoning of about 20 months and a weighted-average remaining tenure of 48 months. The average size of the loans stood at RM51,882 as at the same date.
Ang Swee Ee
(603) 7628 1113
Wednesday, June 29, 2011
Published on 29 June 2011
RAM Ratings has reaffirmed the AAA rating of Industrial Bank of Korea’s (IBK or the Bank) RM3 billion Conventional and/or Islamic Medium-Term Notes Programme, with a stable outlook. The rating reflects IBK’s strategic and public-policy role in relation to South Korea’s small and medium-sized enterprises (SMEs), as well as government support in maintaining the Bank’s solvency under the IBK Act. The Bank’s privileged status is also highlighted by its ability to issue lower-cost debentures in the form of small and medium-industry finance (SMIF) bonds for its funding purposes.
Meanwhile, we do not expect the privatisation of IBK to materialise anytime soon, as the regulators focus on safeguarding the soundness of the South Korean financial system amid concerns over the country’s real-estate sector. While IBK’s privatisation is inevitable in the long run, the process is likely to be a gradual one, in the interest of maintaining financial stability. On this note, we expect the South Korean government to progressively reduce its equity but remain a controlling shareholder. As such, we expect IBK to continue benefiting from strong government support in the medium term.
The slump in the South Korean property market, meanwhile, has negatively affected the construction- and real-estate-related sectors, with real-estate project financing the worst hit. Like most banks in the country, IBK has not been spared from the effects of the downturn. The Bank’s gross non-performing-loan ratio weakened to 1.8% as at end-December 2010 (end-December 2009: 1.4%). At the same time, loan-loss provisions over average gross loans climbed up to 1.4% (end-December 2009: 1.0%), albeit partly to maintain a robust coverage level. While credit losses are expected to be reduced this year amid the new provisioning method under the Korean International Financial Reporting Standards, weaknesses in the construction and real-estate sectors are unlikely to ease in the near term, and could lead to further deterioration in asset quality. IBK’s substantial exposure to the SME sector (79% of its loan portfolio) may also amplify the pressure on its asset quality, given the withdrawal of supportive measures for the sector in 2010.
Reflecting IBK’s weak base of customer deposits, its loans-to-deposits (LD) ratio came up to a high 226.1% as at end-December 2010. Including SMIF bonds issued over the counter to retail clients, the Bank’s adjusted LD ratio stood at 161% as at the same date - still significantly above the industry average of 118.3%. On another note, IBK’s overall and tier-1 risk-weighted capital-adequacy ratios stayed adequate at 12.3% and 8.9%, respectively, as at end-December 2010 (end-December 2009: 11.7% and 8.5%). Although these were below the corresponding 14.6% and 11.6% averages of the South Korean banking system and its AAA-rated peers, we believe that the South Korean government will extend its support should the need arise – as demonstrated by its capital injections during the recent global financial crisis.
(603) 7628 1078
Published on 28 June 2011
RAM Ratings has reaffirmed the A2 rating of Rubberex Corporation (M) Berhad’s (Rubberex or the Group) RM50 million Medium-Term Notes (MTN) Programme (2006/2013). However, the outlook on the rating has been revised from stable to negative. Rubberex is involved in the manufacture and sale of vinyl, household and industrial gloves as well as the trading of personal protective products.
The revision of the rating outlook primarily reflects RAM Ratings’ concerns on Rubberex’s vinyl-glove business. The Group’s China-based vinyl-glove operations have been affected by overcapacity in the region following the entrance of many new players and the doubling of production from existing manufacturers in the last 2 years. The situation had exerted downward pressure on selling prices and made it challenging for the Group to pass on the higher raw material costs, which trimmed the Group’s margins for FY Dec 2010.
Meanwhile, the profit margins of Rubberex’s household and industrial gloves divisions have also been thinning since 3Q FY Dec 2010. While we expect Rubberex to be able to pass on its heftier latex costs to its customers, with a time lag of 1-2 months for industrial gloves and 3-4 months for household gloves, persistent escalation in latex costs would prolong the recovery of this segment’s profit margin.
Against these backdrops and the stronger ringgit against the US dollar, Rubberex’s operating profit before depreciation, interest and tax descended 14.2% year-on-year (y-o-y) in FY Dec 2010, despite its stronger top line. While revenue from the household- and industrial-glove divisions surged 30% y-o-y in FY Dec 2010, this failed to compensate the 4% drop in sales of vinyl gloves, i.e. the Group’s core product. Rubberex’s pre-tax profit was also slashed from RM23.3 million to RM10.15 million y-o-y. The Group’s performance continued to deteriorate in 1Q FY Dec 2011; revenue shrank 14.3% y-o-y to RM78.31 million while operating profit before interest and tax was halved to RM3.37 million, mainly due to the aforementioned factors.
“In the near team, the operating environment is expected to remain challenging. As input prices are expected to continue rising, Rubberex’s margins are envisaged to weaken amid its limited ability to pass on the higher costs to its customers,” opines Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Going forward, we do not expect Rubberex to take up additional borrowing this year as its expansion has been put on hold amid the current oversupply of vinyl gloves. As such, the Group’s funds from operations debt coverage is envisaged to remain around 0.2–0.3 times while its gearing ratios are seen to hover at about 0.6-0.9 times.”
Meanwhile, the rating remains supported by Rubberex’s established market positions as one of the top 5 vinyl-glove producers in the world and among the larger and more established manufacturers of household and industrial gloves in Malaysia, relatively resilient demand for vinyl disposable gloves, and its moderate balance sheet. Nonetheless, these positives are offset by the Group’s vulnerability to input price volatility and shortages in the supply of raw materials, besides its exposure to foreign-exchange risk.
The rating outlook could be revised to stable should Rubberex’s operations in both China and Malaysia demonstrate sustainable improvement in their profit margins. On the other hand, the rating could be downgraded if the operating environment continues to deteriorate and both Rubberex’s operations continue experiencing thinning margins that further erode its debt protection metrics.
Low Pui San
(603) 7628 1051
Published on 27 June 2011
RAM Ratings has reaffirmed the AA1 rating of Teknologi Tenaga Perlis Consortium Sdn Bhd’s (TTPC or the Company) RM1,515 million Al-Istisna’ Fixed-Rate Serial Bonds (2001/2016) (the Bonds), with a stable outlook. TTPC is an independent power producer (IPP) that owns and operates a 650-MW natural gas-fired, combined-cycle power plant (the Plant) in Kuala Sungai Baru, Perlis.
The rating remains supported by TTPC’s sound business profile, underscored by the favourable terms of its Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB). Under the terms of the PPA, TTPC is entitled to earn full available capacity payments (ACPs) irrespective of the quantum of electricity generated - subject to meeting certain performance requirements. In addition, the IPP is allowed to fully pass through its fuel costs to TNB based on the formula for energy payments (EPs) in the PPA, so long as the Plant operates within the allowable heat-rate requirements. TTPC’s rating is also driven by its commendable operating performance to date. Since commissioning, the Plant has been meeting all the performance requirements under the PPA to earn full ACPs, and has been able to fully pass through its fuel costs each year.
Despite having repaid RM115 million of the Bonds’ principal and distributing RM80 million of dividends to its shareholders, TTPC’s finance service cover ratio (FSCR) remained intact at 2.15 times (with cash balances, post-distribution) in FYE 30 September 2010 (FY Sep 2010). Looking ahead, TTPC is projected to maintain its strong debt-servicing ability, with an average annual pre-financing cashflow of approximately RM220 million. This translates into a projected FSCR of at least 1.41 times (with cash balances, post-distribution) on its principal repayment dates throughout the remaining tenure of the Bonds. RAM Ratings’ cashflow analysis assumes that TTPC would pay optimum dividends to its shareholders - pursuant to a shareholders’ agreement on 23 May 2008 - while adhering to its financial covenants throughout the Bonds’ tenure (i.e. on a forward-looking basis, as opposed to only the year of assessment). Such covenants include a post-distribution FSCR of at least 1.4 times, the requirement to maintain a balance in the finance service reserve account that is equivalent to its total obligations due on the next maturity date, and ensuring that its debt-to-equity ratio does not exceed 80:20.
In the meantime, the rating remains moderated by TTPC’s exposure to regulatory and single-project risks, similar to all other IPPs.
(603) 7628 1075
Tuesday, June 28, 2011
Published on 27 June 2011
RAM Ratings has reaffirmed EON Bank Berhad’s (EON Bank or the Group) long- and short-term financial institution ratings at A1 and P1, respectively. At the same time, the ratings of its Innovative Tier-1 Capital Securities Issuance Programme of up to RM1 billion and Subordinated Medium-Term Notes (MTN) Issuance Programme of up to RM2 billion have been reaffirmed at a respective A3 and A2. We have maintained the positive Rating Watch on all the long-term ratings.
Hong Leong Bank Berhad (Hong Leong Bank) completed the acquisition of assets and liabilities of EON Bank’s parent company – EON Capital Berhad (EON Capital) – on 6 May 2011. All the assets and liabilities of EON Bank are targeted to be novated to Hong Leong Bank by 1 July 2011. The positive Rating Watch is underpinned by the imminent rating upgrade for EON Bank’s debt facilities upon the transfer of its assets and liabilities to Hong Leong Bank pursuant to a Vesting Order from the High Court, to mirror the credit standing of the obligor of its debt facilities, i.e. Hong Leong Bank. The financial institution ratings of EON Bank will likely be withdrawn. RAM Ratings reaffirmed Hong Leong Bank’s AA1/P1 financial institutions ratings on 29 April 2011, with a stable outlook.
The reaffirmation of EON Bank’s ratings is premised on the Group’s sound franchise in vehicle financing, with a market share of 9.0% as at end-December 2010. EON Bank’s healthy asset quality is reflected in its gross impaired-loan ratio of 3.6% as at the same date; its loan-loss reserve coverage over gross impaired loans improved from 83.0% to 89.6% over the same period. Mainly supported by stronger net interest income, EON Bank’s respective return on assets and return on equity were lifted to 1.1% and 14.1% as at end-December 2010 (end-December 2009: 1.0% and 11.9%). With loan-to-deposit ratio of 88.4% and liquid asset ratio of 31.9% as at the same date, the Group is deemed to have a healthy liquidity and funding position. In terms of capitalisation, EON Bank’s overall risk-weighted capital-adequacy ratio (RWCAR) and tier-1 RWCAR remained sound at a respective 15.4% and 10.9%.
Post-merger, EON Capital and Hong Leong Bank (the Merged Entity) will become the fourth-largest banking group in Malaysia, with about RM140 billion of assets. The Merged Entity’s market shares of the industry’s loans and deposits are estimated at 9.0% and 9.9%, respectively. Given the more balanced loan mix and higher penetration rates, particularly in retail lending, the Merged Entity is envisaged to have a better competitive position than its larger peers. Benefiting from Hong Leong Bank’s traditionally robust risk management processes and sound funding profile, the Merged Entity is expected to enjoy healthy credit metrics. Nevertheless, RAM Ratings is mindful of potential near-term integration issues along with a typical 2- to 3-year gestation period before the advantages of the merger can materialise.
RAM Ratings' Rating Watch highlights a possible change in an existing rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rating under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.
Ratings will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.
(603) 7628 1078
Thursday, June 23, 2011
Published on 23 June 2011
RAM Ratings has assigned a long-term rating of AA1 (with a stable outlook) to Sarawak Energy Berhad's ("SEB" or "the Group") proposed Sukuk Musyarakah Programme of up to RM15 billion ("Sukuk"). SEB is the Sarawak State Government’s (“the State”) wholly owned, vertically integrated electricity group with a monopoly over the generation, transmission and distribution of electricity in Sarawak. The rating is premised on this integral role and the strong support from both the State and Federal Governments. These strengths are however, moderated by demand risk arising in relation to the sizeable new generating capacity on the horizon and its expected impact on SEB’s financial profile.
The Group has emerged as a key facilitator of the State and Federal Governments’ plans to tap Sarawak’s vast energy resources via the development of the Sarawak Corridor of Renewable Energy (“SCORE”). In fulfilling these aspirations, SEB’s generating capacity is set to triple within a relatively short time, with Sarawak’s electricity reserve margin expected to peak at 150% by 2012 (2010: 13%).
Naturally, demand risk will feature more prominently in our assessment of the Group’s credit profile, along with concentration risk arising from the relatively larger industrial off-takers that will establish operations in the SCORE. Nonetheless, these risks are moderated to some extent by the respective take-or-pay power purchase agreements that will be in place and the Group’s diverse customer profile. SEB has to date secured buyers for roughly half of the new 3,011 MW of capacity coming on-stream by 2015. In the meantime, the remaining capacity is expected to be taken up by additional off-takers that are in negotiations with SEB.
To keep pace with the State’s new-found energy needs under the SCORE, the Group’s debt load is projected to increase from RM2.51 billion as at end-December 2010 to RM16.69 billion by end-December 2013, at which point its gearing level is envisaged to peak at 4.27 times. In line with the expected lengthy gestation period for such endeavours, this will mark the beginning of a phase of weak financials, during which SEB’s funds from operations debt coverage is anticipated to drop from 0.30 times as at end-2010 to a mere 0.06 times over the next few years.
Meanwhile, SEB maintains its close links with the State; as a unit directly under the purview of the State Financial Secretary, it enjoys strong implicit support from the State, which determines its strategic direction, board of directors and key management. Heavily subsidised natural gas from Petroliam Nasional Berhad is also made available to the Group. RAM Ratings believes that there is great incentive for financial assistance to be provided, if necessary, because SEB’s failure to meet its financial and operational obligations would severely undermine the SCORE’s success.
(603) 7628 1030
Yean Ni Ven
(603) 7628 1172
Published on 21 June 2011
RAM Ratings has assigned respective long- and short-term ratings of A2 and P1 to Pac Lease Berhad’s (PacLease or the Company) Proposed Commercial Papers/Medium-Term Notes Issuance Programme (CP/MTN Programme) of up to RM500 million. Concurrently, RAM Ratings has reaffirmed the respective long- and short-term ratings of the Company’s RM200 million CP/MTN Programme, at A2 and P1. Both long-term ratings have a stable outlook. The ratings are premised on PacLease’s healthy asset-quality indicators and the strong support from its ultimate major shareholder, Oversea-Chinese Banking Corporation Limited (OCBC Singapore). The ratings also take into consideration the Company’s newly acquired loan portfolio arising from business expansion which has not been fully seasoned, as well as the fragmented and competitive nature of the hire-purchase (HP)/ leasing industry.
PacLease is a wholly owned subsidiary of PacificMas Berhad (PacificMas), which in turn is ultimately owned by OCBC Singapore; the latter influences the strategic direction of PacLease. In FYE 31 December 2010 (FY Dec 2010), PacLease achieved a 54% growth in its gross receivables, on the heels of a 36% increase in FY Dec 2009. In a bid to achieve critical mass and generate higher returns on equity, PacLease intends to expand its receivables base to RM1.3 billion by 2014 (end-December 2010: RM553.9 million). As part of its growth strategy, the Company seeks to expand its receivables base beyond its traditional HP and leasing activities.
PacLease’s outstanding gross impaired loans had increased to RM7.6 million as at end-December 2010 (end-December 2009: RM5.0 million) – mainly attributable to additional newly impaired loans during the year. Given its enlarged loan base, however, the Company’s gross and net impaired-loan ratios remained unchanged at a respective 1.4% and 0.3%. Given the management’s proactive approach to provisioning, the Company’s loan-loss reserve coverage stood at a strong 147.1% as at end-December 2010. Overall, PacLease’s asset-quality indicators are deemed healthy, notwithstanding its recent rapid expansion.
Supported by stronger net interest income from its credit expansion and more robust non-interest income, PacLease’s returns on assets and equity improved to 3.0% and 11.6%, respectively, as at end-FY Dec 2010 (end-FY Dec 2009: 2.2% and 8.6%). Despite heftier borrowings, its gearing ratio only edged up to 3.0 times as at the same date (end-December 2009: 2.7 times), due to a RM35 million capital injection from PacificMas and the retention of all earnings for FY Dec 2010. Looking ahead, PacLease’s gearing ratio is likely to rise in tandem with its planned business expansion, although further capital infusions from its parent are expected to moderate the uptrend. Meanwhile, its interest-servicing ability is deemed healthy, with an interest coverage of 2.2 times as at end-December 2010 (end-December 2009: 2.1 times).
(603) 7628 1078
MARC ASSIGNS AAAID(fg) RATING TO ANTARA STEEL MILLS SDN BHD’S PROPOSED RM300 MILLION GIS; AFFIRMS AID RATING ON RM500 MILLION BaIDS
Jun 22, 2011 -
MARC has assigned a rating of AAAID(fg) to Antara Steel Mill Sdn Bhd’s (Antara) RM300 million Guaranteed Islamic Securities (GIS) programme with a stable outlook. The RM300 million GIS programme is guaranteed by Danajamin Nasional Bhd (Danajamin). At the same time, MARC has affirmed its rating of AID on Antara’s existing RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) while revising the rating outlook to stable from positive to reflect Antara’s moderating financial performance in recent quarters.
The rating on the GIS programme is premised on MARC’s current rating of Danajamin’s financial strength at AAA/stable based on its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base supported by ample liquidity and a conservative investment policy. The rating on the BaIDs reflects Antara’s strong domestic market position in the steel sector, its stronger credit metrics relative to its peers in the industry and the sensitivity of steel demand to worldwide general economic conditions. The impact of the recent earthquake and tsunami on the world’s second largest producer of steel, Japan, could lift steel prices in Asia higher due to the fall in production capacity caused by damage to key steel mills. Adding to steel price volatility is the recent surge in the cost of iron ore and coking coal and the cyclical demand from steel-consuming industries.
Antara’s steel operations are carried out at its Labuan plant which produces hot-briquetted iron (HBI), a form of scrap substitute used in the manufacture of high grade steel, and its Pasir Gudang plant which produces semi-finished and finished steel products such as billets and bars. MARC notes that the more profitable operations of Antara’s Labuan plant have historically compensated for the weaker performance of its ageing Pasir Gudang plant and is expected to continue do so in the near to medium term. For the first six months ended December 31, 2010 (1HFY2011), the Labuan plant registered an operating profit margin of 9.9% (1HFY2010: 18.8%) as opposed to a negative operating margin of 5.7% (1HFY2010: -1.0%) for its Pasir Gudang plant (bars and billets). In common with its domestic peers in the industry, Antara’s business continues to be subject to cyclical demand and volatility in iron ore prices which have negatively impacted its performance in 1HFY2011 compared to its full-year FY2010 performance. Operating profit declined to RM21.2 million in 1HFY2011 (1HFY2010: RM66.1million), also as a result of higher repairs and maintenance costs, in particular for its Pasir Gudang plant which registered a lower-than average utilisation rate of 47% compared to 60% in FY2010.
Antara’s financial performance had benefited from the lower raw material costs charged to cost of sales arising from a RM201.8 million inventory write-down in the previous financial year. Antara uses the weighted average inventory costing method. The improved performance was also supported by higher output for all products as well as higher average selling price for bars, which translated to strong cash flow from operations (CFO) of RM207.07 million (FY2009: RM242.08 million). Meanwhile, CFO interest and debt coverage ratios also improved as a result of reduced debt following a RM110.0 million BaIDs repayment in August 2009. With a further redemption of RM110 million in August 2010, Antara’s debt-to-equity ratio improved to 0.15 times as at December 31, 2010. MARC notes that unlike many of its domestic peers, Antara is not burdened with substantial debt. Upon the issuance of the RM300.0 million under the GIS programme and additional RM100.0 million of financing for working capital, Antara’s pro-forma D/E ratio would be increased to a still satisfactory 0.46 times.
MARC views Antara’s liquidity position as adequate relative to its near - to medium - term needs, taking into account its relatively strong cash flow generation ability and proceeds from its GIS issuance. Part of the proceeds from the new issue will be used for the final redemption of its outstanding BaIDS of RM130.0 million due in August 2011. The balance of the proceeds would be largely used to finance working capital needs. MARC believes that rising raw material prices will result in higher working capital requirements. MARC anticipates some near-term moderation of Antara’s cash flow coverage measures as a result of the additional debt taken to fund its working capital needs.
Noteholders are insulated from the downside risks in relation to Antara’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.
Ahmad Gazzara, +603-2082 2259/ firstname.lastname@example.org;
Rajan Paramesran, +603-2082 2233/ email@example.com.
Published on 22 June 2011
RAM Ratings has reaffirmed the ratings of RH Capital Sdn Bhd’s (RH Capital or the Issuer) RM135 million Sukuk Ijarah (Sukuk Ijarah) and Sukuk Ijarah Commercial Paper/Medium-Term Notes (CP/MTN) Programme (collectively, “the Islamic Securities”); all the long-term ratings have a stable outlook. The stable rating outlook represents our expectation that the lessees (or the operators of the transaction’s assets) will be able to meet their scheduled Ijarah payments and, in turn, the payment obligations under the Islamic Securities throughout their remaining tenures.
The reaffirmation of the respective AAA, AA2 and A2 ratings of the Class A, Class B and Class C Sukuk Ijarah is premised on the transaction’s structural features and the cashflow stemming from the plantations, which is expected to average at around RM10 million per annum – in line with our sustainable cashflow projections. Together with the oil mills, the resultant adjusted valuations, loan-to-value (LTV) ratios and debt service cover ratios (DSCRs) remain commensurate with the ratings. To date, the lessees have performed their Ijarah obligations on a timely basis; this includes the most recent RM15 million principal redemption of the Class C Sukuk Ijarah in December 2010.
Meanwhile, the AAA(s)/P1(s) ratings of the Sukuk Ijarah CP/MTN Programme reflect the enhancement provided by the Sukuk Put Option, granted by OCBC Bank (Malaysia) Berhad (OCBC Malaysia) to the Sukuk holders. RAM Ratings reaffirmed OCBC Malaysia’s AAA/P1 financial institution ratings, with a stable outlook, on 27 October 2010.
Due to the lagged weather effects from El Nino in early 2010 and La Nina towards the end of last year that had hampered harvesting activities, the 3 estates’ average yields of fresh fruit bunches (FFB) declined slightly to 11.4 metric tonnes per matured hectare (MT/ha) in 2010 (2009: 12.3 MT/ha); this pattern emulated the year-on-year (y-o-y) performance at state level. Concurrently, the 3 estates’ FFB yields remained below Sarawak’s average of 14.9 MT/ha. Despite that, the cashflow generated by the estates had strengthened y-o-y because of higher FFB selling prices.
While the management had made some efforts - such as hiring more experienced and qualified estate managers and improving infrastructure - we expect a period of gestation before any significant progress in FFB yields, particularly given the 3 estates’ relatively young trees. Notably, 30% of their palms fall into the “immature” bucket while the remainder are generally young palms that produce relatively lesser yields compared to those in the prime bucket. Furthermore, the plantations’ performance remains challenged by erratic weather patterns. That said, there are signs of recovery from tree stress after the bumper crop in 2008; the industry is expected to experience the next cycle of strong production within the next 2 years.
Overall, the palm-oil mills of RH Selangau and RH Lundu exhibited a stable oil-extraction rate (OER) of 20.2% in 2010 (2009: 20.7%). At the same time, the mills’ kernel-extraction rate (KER) slipped slightly to 3.9% (2009: 4.2%), mainly due to smaller kernels from the younger palms. Underpinned by firm prices for crude palm oil (CPO) and more robust CPO output (+12.5% y-o-y), the lessees’ overall net operating cashflow augmented from RM27.0 million to RM42.1 million y-o-y. Going forward, we envisage the lessees’ performance to continue to be affected by CPO price movements. Nonetheless, we also derive comfort from Tiong Toh Siong Sdn Bhd’s – the parent company of RH Capital and the lessees – undertaking to meet the debt obligations under the Islamic Securities, if and when required.
Tan Han Nee
603 – 7628 1023
Published on 21 June 2011
RAM Ratings has reaffirmed the enhanced AAA(bg)/P1(bg) ratings of E&O Property (Penang) Sdn Bhd’s (EOPP or the Company) RM350 million Bank-Guaranteed Commercial Papers/Medium-Term Notes Programme (CP/MTN); the long-term rating has a stable outlook. The enhanced long-term rating reflects the unconditional and irrevocable bank guarantee extended by Malayan Banking Berhad (Maybank) (rated AAA/Stable/P1 by RAM Ratings) while the enhanced short-term rating reflects the unconditional and irrevocable bank guarantee extended by Maybank and Affin Bank Berhad (rated A1/Stable/P1 by RAM Ratings). The backing of the bank guarantee enhances the credit profile of the CP/MTN beyond EOPP’s stand-alone credit standing.
EOPP is the developer of Phase 1 of the Seri Tanjung Pinang project (the Project) - a mixed development spanning 240 acres of reclaimed land in Tanjung Tokong, Penang, with a gross development value of approximately RM3.6 billion. EOPP is 95.6%-held by E&O Property Development Berhad, which is in turn a wholly owned subsidiary of Bursa listed Eastern & Oriental Berhad (E&O Berhad or the Group). As at 8 February 2011, EOPP had sold more than RM1.36 billion of properties since its maiden launch in October 2005; about RM332.06 million remained unbilled.
Excluding the bank guarantee, EOPP’s credit fundamentals are supported by its parent’s established track record and strong branding. This, coupled with the Project’s mature status and its strategic location i.e. close proximity to Gurney Drive are expected to augur well for EOPP. As EOPP is an integral part of the Group, we believe it will continue to enjoy strong parental support. These factors are balanced against the Company’s single-project risk and heavy debt load against the backdrop of intense competitive pressures.
Jeremy de Silva
(603) 7628 1031
Tuesday, June 21, 2011
Published on 20 June 2011
RAM Ratings views the recent news on the receivership status of the owner of the petroleum hub project at Tanjung Bin, Johor (APH project), to have no rating impact on Muhibbah Engineering (M) Bhd’s (Muhibbah or the Group) RM130 million Islamic Bonds. Muhibbah is one of the contractors for the APH project.
Muhibbah’s Islamic Bonds carry a AAA(s) rating with a stable outlook, supported by the irrevocable and unconditional guarantee from Malayan Banking Berhad (Maybank) to honour Muhibbah’s irrevocable and unconditional undertaking to purchase and cancel all the Islamic Bonds at the exercise price upon the declaration of an event of default (Purchase Undertaking). The Trustee, on behalf of the bondholders, will be able to call on the bank guarantee to honour Muhibbah’s Purchase Undertaking. The guarantee from Maybank enhances the credit profile of the Islamic Bonds beyond Muhibbah’s inherent or stand-alone credit standing.
It was reported that the financier of the APH project, CIMB Bank Berhad, has appointed a receiver and manager for the developer and operator of the APH project. The outstanding amount owed to Muhibbah for certified works done on the project and related costs stood at RM370.8 million as at 31 December 2010.
As it is, the Group’s stand-alone credit profile has been affected by its weaker-than-expected profit performance, balance sheet and debt coverage ratios, as well as its tight liquidity profile. The Group also faces collection issues, including the large aforementioned receivable for the APH project. The project was halted in FY Dec 2009 partly due to the spike in raw material prices in 2008 which led to a ballooning of the project cost. It was reported that the project owner is currently negotiating with a new investor to bring in funds to resuscitate and complete the project, including making due payments to contractors. Nevertheless, negotiations had been rather protracted, and we view that it is unlikely for Muhibbah to collect the amount owed in the near term.
Nevertheless, RAM Ratings notes that Muhibbah has an established track record within the construction industry, specialising in oil-and-gas-related jobs, marine-engineering and civil-engineering jobs. Muhibbah’s outstanding order book of RM2.9 billion as at 19 May 2011 will sustain the Group over the next 2 years. Muhibbah also derives earnings diversity, from its involvement in the construction, cranes and shipyard segments. It also enjoys recurring dividend income from its associate stakes in the concessionaire for road-maintenance work in Malaysia and an operator and concession holder for 3 international airports in Cambodia.
(603) 7628 1174
Monday, June 20, 2011
Published on 17 June 2011
RAM Ratings has reaffirmed the AA2 rating of Seafield Capital Berhad’s (Seafield Capital) RM1.5 billion Sukuk Musharakah Programme (2009/2029) (the Sukuk), the rating has a stable outlook. Our analysis is based on the assumption that up to RM1.1 billion will be drawn down under the Sukuk. We highlight that the aggregate nominal value of the Issuer’s indebtedness can only exceed the aggregate principal amount of RM1.1 billion if it does not result in a rating downgrade for any outstanding Sukuk. Notably, Seafield Capital has to date drawn down RM950 million of the Sukuk.
Seafield Capital is a trust-owned, special-purpose company through which Expressway Lingkaran Tengah Sdn Bhd (ELITE) issued the Sukuk to meet the Company’s funding requirements. ELITE is the concessionaire for the 63-km North-South Expressway Central Link, the Kuala Lumpur International Airport (KLIA) Extension Link and the Putrajaya Link (collectively referred to as “the Expressways”).
Under the transaction structure, the Sukuk holders’ recourse to ELITE is recognised via an irrevocable and unconditional Purchase Undertaking Deed between Seafield Capital and ELITE. Through this document, ELITE (as the obligor) will undertake to purchase the trust assets from Seafield Capital upon the occurrence of certain events, at a price equal to the Exercise Price. Given the strong credit link between these parties, RAM Ratings views them in aggregate from a credit perspective. The rating of the Sukuk is, therefore, a reflection of ELITE’s credit risk.
The rating is supported by ELITE’s strong business profile underscored by the Expressways’ strategic alignment as the primary link between the New Klang Valley Expressway (at Shah Alam) and KLIA to the North-South Expressway (NSE) (at the Nilai Interchange). In 2010, traffic volume leaped 11.36% year-on-year (y-o-y) to 1,605.27 million passenger car unit kilometre (PCU-km) (2009: 1,441.52 million PCU-km). The up-tick in traffic volume continued to be supported by flow-through traffic from the NSE, which accounted for 42% of the total traffic plying the Expressways; traffic on the NSE increased 7.68% (y-o-y) in 2010.
The excellent operating track record of the Expressways is expected to translate into strong cashflow generation. Based on RAM Ratings’ analysis, ELITE is expected to maintain its commendable debt-servicing aptitude with a robust projected minimum finance service cover ratio (FSCR) on principal repayment date (with cash balances, post-distribution) of 2.03 times, this is based the maturity profile of the outstanding Sukuk of RM950 million. In assessing ELITE’s annual distributions to its shareholders, RAM Ratings’ cashflow analysis assumes ELITE will adhere to its financial covenants throughout the tenure of the Sukuk (i.e. on a forward looking basis as opposed to the year of assessment only). Such financial covenants include compliance with the Finance Service Reserve Account and Government Loan Service Reserve Account requirements as well as the post-distribution FSCR of 2 times.
Meanwhile, the rating is moderated by the uncertainty of ELITE’s financial profile given that the transaction features of the Sukuk affords Seafield Capital the flexibility of issuing additional Sukuk and incurring other borrowings (which in aggregate shall not exceed the principal amount of RM1.5 billion and is subjected to a reduction schedule). This is unlike other typical project-financed structures where the level, terms and repayment profile of debt is fixed at the outset. At the same time, the rating also remains moderated by regulatory and single-project risks.
Lee Chai Len
(603) 7628 1192
Friday, June 17, 2011
Jun 17, 2011 -
MARC has revised its outlook on Sime Darby Berhad's (Sime) MARC-1ID /AAAID debt ratings to stable from negative. The outlook revision affects the following facilities of Sime:
1) RM4.5 billion Islamic Medium Term Note (IMTN) Programme (RM2.0 billion outstanding) and RM500 million Islamic Commercial Paper (ICP) Programme (RM500 million outstanding) with combined limit of RM4.5 billion; and
2) RM150 million Underwritten Murabahah Commercial Papers Facility.
The outlook revision reflects abating downside risks to Sime's consolidated credit profile from projects of its Energy & Utilities (E&U) division. The E&U division's EBIT of RM219.5 million for the nine months to March 31, 2011 (9MFY2011) marks a turnaround from the RM1,019.3 million loss for the prior year corresponding period.
The progress made on E&U division's problem projects since the rating agency's last rating action in October 2010 has alleviated MARC's major concerns about project execution risk and the potential for additional losses. MARC notes a RM98.5 million write-back of provisions for E&U division's Maersk Oil Qatar project in the third quarter of FY2011 following project close-out. Meanwhile, its Qatar Petroleum project (in respect of which a RM200 million provision has been made in 3QFY2010) has moved into the close-out phase. The Bakun dam project in which Sime is the lead consortium member with a 35.7% interest is scheduled for handover end-2011 while completion of India-based ONGC project is targeted by June 2012. Provisions of RM450 million made for the Bakun dam project and RM227 million for the ONGC project are expected to provide adequate buffer for actual cost overruns.
Sime recently announced that it would be exiting from oilfield services by divesting Sime Darby Engineering Sdn Bhd's (SDE) oil and gas assets for a provisional cash consideration of RM695 million. Non-binding memoranda of understanding (MOUs) for the disposals of its Teluk Ramunia and Pasir Gudang fabrication yards have been signed with national oil company Petroliam Nasional Berhad (Petronas) and Malaysia Marine and Heavy Engineering Holdings Berhad (MHB) respectively, for this purpose. MARC views the divestments as positive for Sime's consolidated credit profile in light of the operational challenges of its oilfield services business and huge prior year losses. The disposal of the oil and gas assets will allow Sime to focus on its core plantation, property, automotive and industrial businesses, and show improvement in its consolidated profitability. MARC understands that Sime would still have to complete its outstanding contractual obligations notwithstanding the divestments.
For the nine to March 31, 2011, Sime reported a doubling of consolidated pre-tax profit to RM3.4 billion (9MFY2010: RM1.7 billion) on consolidated revenue of RM29.7 billion (9MFY2010: RM23.7 billion). The group saw higher contributions from its plantation, industrial and motor divisions which reported increases of 18%, 30% and 90% respectively in EBIT. Its EBITDA interest coverage also strengthened to 17.4 times (9MFY2010: 14.3 times). Sime's consolidated liquidity remains strong with cash and cash equivalents of RM4.1 billion (FY2010: RM4.4 billion) as of March 31, 2011 against short-term borrowings of RM3.2 billion (FY2010: RM3.3 billion).
In light of the above developments, MARC considers Sime's credit metrics to be sufficiently restored and commensurate with its long-term rating of AAA. Further factored into the stable outlook is Sime's strong commitment to preserve its current ratings.
Benjamin Yab, 03-2082 2270/ firstname.lastname@example.org;
Rajan Paramesran, 03-2082 2233/ email@example.com.
Published on 17 June 2011
RAM Ratings has reaffirmed HSBC Bank Malaysia Berhad’s (HSBC Malaysia or the Bank) respective long- and short-term financial institution ratings, at AAA and P1. Concurrently, we have also reaffirmed the AA1 rating of the Bank’s RM1 billion Tier-2 Subordinated Bonds (Sub Bonds). Both the long-term ratings have a stable outlook. The 1-notch rating differential between the Bank’s long-term financial institution rating and that of its Sub Bonds reflects the latter’s subordination to the Bank’s senior unsecured creditors.
Meanwhile, the financial institution ratings are premised on HSBC Malaysia’s strong international franchise and established domestic market position, on top of its healthy asset quality and adequate capitalisation. It is the largest locally incorporated foreign bank in Malaysia by asset size and is wholly owned by HSBC Holdings plc (HSBC Holdings or the Group), a global financial institution. Aside from parental support, the Bank is also able to leverage on the HSBC Holdings’ international network, brand name, expertise and best practices.
In FY Dec 2010, HSBC Malaysia charted a 19% growth in its gross loans; this followed the Bank’s cautious lending strategy amid the uncertain economic environment the year before, which had resulted in a 3.3% contraction. The Bank’s asset quality had also improved, with its gross impaired-loan ratio easing to 2.0% as at end-December 2010 (end-December 2009: 2.3%) on the back of a lower quantum of net newly impaired loans. For the year, the Bank achieved a stronger pre-tax profit of RM1.0 billion (FY Dec 2009: RM882.7 million), supported by generally higher income. Its funding and liquidity positions are viewed to be sturdy, with a loans-to-deposits ratio of 70.5% and a liquid-asset ratio of 48.3% as at end-December 2010. At the same time, the Bank’s overall risk-weighted capital-adequacy ratio came up to 13.7%. Moving forward, HSBC Malaysia’s capitalisation is expected to remain adequate, taking into account its targeted loan growth this year.
In 1Q FY Dec 2011, HSBC Malaysia’s asset quality, funding, liquidity and capitalisation levels remained stable. Nonetheless, its pre-tax profit slipped slightly to RM294.9 million (1Q FY Dec 2010: RM296.7 million), mainly due to a higher collective impairment charge on the back of stronger loan growth. All said, we expect the Bank’s financial performance to improve in fiscal 2011, capitalising on the country’s resilient economic growth.
(603) 7628 1049
Thursday, June 16, 2011
RAM Ratings reaffirms ratings of Bandar Raya’s debt facilities, revises outlook from stable to negative
Published on 15 June 2011
RAM Ratings has reaffirmed the respective long- and short-term ratings of Bandar Raya Developments Berhad’s (BRDB or the Group) RM200 million Nominal Value Commercial Papers/Medium-Term Notes Programme (2007/2014), at A1 and P1. At the same time, the A1 rating of BRDB’s RM100 million Bonds with warrants (2007/2012) has also been reaffirmed. The outlook on both long-term ratings has been revised from stable to negative.
The revised outlook is premised on BRDB’s weaker financial profile as a result of slower-than-expected property sales and delays in new launches, which had steadily reduced its unbilled sales from RM879 million as at end-December 2008 to RM225 million as at end-March 2011. This had in turn affected its debt coverage, which came in below our expectations. Year-on-year in FY Dec 2010, BRDB’s operating profit before depreciation, interest and tax debt coverage ratio shrank from 0.27 times to 0.12 times while its funds from operations debt coverage ratio descended from 0.23 times to 0.12 times.
Going forward, the Group may face more challenges as most of its future projects are within the keenly competitive medium-to-high-end condominium market. BRDB’s ratings will face downward pressure if its unbilled sales keep getting depleted and/or its debt coverage deteriorates further. On the other hand, the negative outlook could be reverted to stable if BRDB is able to replenish its unbilled sales and demonstrate sustainable improvement in its financial profile.
The reaffirmation of the ratings, meanwhile, is premised on BRDB’s established reputation and strong branding in high-end developments, including The Troika in KLCC and One Menerung in Bangsar. Its recently launched 6 CapSquare in Kuala Lumpur achieved a take-up rate of more than 50% in less than 6 months. The management has planned about RM4 billion of new projects in various parts of the Klang Valley and Johor over the next 2 years. The Group recently replenished its land bank through the formation of various joint ventures - marking a shift in focus from BRDB’s traditional strongholds to new areas in Selangor (Seri Kembangan, Rawang and Gombak), Penang and Johor (Nusajaya); these are expected to provide development opportunities over the longer term. BRDB also derives some revenue stability from its pool of investment properties, with Bangsar Shopping Centre as its chief contributor.
Elsewhere, BRDB’s 57%-owned chipboard-manufacturing arm, Mieco Chipboard Berhad (Mieco), managed to turn around with a pre-tax profit of RM2 million in FY Dec 2010. Although demand for chipboard seems to have recovered somewhat, it remains to be seen if Mieco can sustain its improved performance, especially with additional capacity from the recent recommencement of operations at its largest plant, which had been closed since November 2008. The still-competitive operating environment, coupled with rising raw-material prices, may add pressure on its margins.
As at end-March 2011, BRDB’s unencumbered cash and bank balances amounted to only RM113 million against RM318 million of short-term debts. Nonetheless, this is mitigated by a recently secured term-loan facility of up to RM450 million.
(603) 7628 1038
Wednesday, June 15, 2011
Jun 14, 2011 -
MARC has downgraded its long-term and short-term Sukuk ratings on Offshoreworks Capital Sdn Bhd (OWC) to BBIS and MARC-4IS, from A+IS and MARC-2IS respectively. The Sukuk ratings remain on MARCWatch Negative where they were initially placed on March 15, 2011 on the basis of an expected covenant breach. The rating actions affect RM200.0 million of outstanding Sukuk Musyarakah and RM150.0 million of outstanding Musyarakah Commercial Paper/Medium Term Notes (MCP/MMTN). OWC is a funding vehicle of oilfield services provider Offshoreworks Holdings Sdn Bhd (OHSB). The OHSB group participates in the underwater diving, geosurveying, construction and engineering, and ship management and chartering segments of the oilfield services sector.
The multiple-notch downgrades reflect severe unaudited losses of RM267.0 million for the 12 months ended December 31, 2010 (FY2010) at OHSB. The full year losses were more than twice of OHSB's pre-tax losses of RM119.5 million for the 11 months to November 30, 2010 after additional charged-out expenses totaling RM218.3 million for non-recoverable cost of idle vessels and equipment (RM136.6 million) and write-down of amounts due from work-in-progress (RM81.7 million). As 75% of the provisions were made in the final quarter of FY2010, the full year losses were significantly worse than MARC's expectations. OHSB's accounting practice of recognising revenue based on costs incurred prior to acceptance by the customer has masked weaknesses in its operating performance and the material adverse change in its credit profile in the last two financial years.
The loss last year resulted in retained losses of RM175.1 million and negative shareholders' funds of RM56.8 million as of end December 2010 compared to a retained profit of RM92.9 million a year earlier. As a result, OHSB is currently in breach of the Sukuk’s gearing covenant; on a pro-forma basis, it requires a RM214.2 million equity infusion to restore its debt to equity ratio to its covenant level of 2.5 times based on its end-December 2010 unaudited financial statements.
Notwithstanding the group's outstanding order book of RM1.45 billion as at December 2010, MARC believes that the group faces significant challenges as a going concern after the huge losses, particularly in light of its depleted capital and strained liquidity. Its cash balances excluding fixed deposits had fallen sharply to a modest RM5.2 million from RM70.8 million in the intervening three month period between September 30, 2010 and December 31, 2010. MARC understands that the group has commenced disposal of some of its non-core operating assets, seeking new investors and is also renegotiating operating lease payment schedules for some of its vessels. Additionally, OWC is seeking temporary waiver of its financial covenant breach, sukukholders' approval to defer its sinking fund build up payments up to August 2011 and release of some moneys currently in the sinking fund for its immediate working capital purposes.
The continuing MARCWatch placement reflects OHSB's increased susceptibility to adverse circumstances leading to default. Failure to develop a credible turnaround plan and to obtain the support of its sukukholders to restructure its rated obligations will most likely place OWC at risk of an acceleration of the rated obligations and immediate demand for repayment. Additionally, MARC is concerned that an audit of OHSB's FY2010 financial statements could lead to a further increase in reported losses. MARC will monitor developments at OHSB and OWC to resolve the MARCWatch placement.
Eric Chua, +603-2082 2245/ firstname.lastname@example.org;
Gary Lim Chun Pin, +603-2082 2243/ email@example.com;
Francis Xaviour Joe, +603-2082 2279/ firstname.lastname@example.org.
Tuesday, June 14, 2011
Published on 13 June 2011
RAM Ratings has reaffirmed United Overseas Bank (M) Bhd’s (UOBM or the Bank) long-term financial institution ratings at AA1, with a positive outlook, while also reaffirming its P1 short-term rating. At the same time, the AA2 rating of the Bank’s RM500 million Subordinated Bonds has been reaffirmed, also with a positive outlook.
The outlook on UOBM’s long-term financial institution rating had been revised from stable to positive in September 2010, premised on the Bank’s improving asset-quality indicators. Its gross impaired-loan ratio had eased to 2.2% as at end-March 2011 (end-March 2010: 3.4%). While partly driven by a sizeable 24% loan growth in FY Dec 2010, the absolute value of the Bank’s gross impaired loans had also reduced, aided by stronger recoveries and fewer newly classified impaired loans. UOBM intends to expand its loan base by another 20% this year, with a focus on residential property mortgages and loans to small and medium-sized enterprises. Although RAM Ratings notes the improvements in the Bank’s loan-quality indicators, a longer track record will be required for an upgrade of its financial institution ratings given its relatively robust lending growth of late and aggressive loan-expansion targets.
Elsewhere, UOBM’s loans-to-deposits ratio has also been easing, albeit still at the higher end of the spectrum at 89% as at end-March 2011 (end-March 2010: 94%). In FY Dec 2010, the Bank’s credit-cost ratio came up to 0.6% (FY Dec 2009: 0.5%), primarily attributable to increased collective impairment provisions. Meanwhile, its overall and tier-1 risk-weighted capital-adequacy ratios stood at a sturdy 16.7% and 14%, respectively, as at end-December 2010 (end-December 2009: 14.9% and 13.1%).
With its strong loan expansion, higher fee income and manageable credit costs, UOBM’s commendable profit track record carried through to FY Dec 2010, when pre-tax profit advanced 20% to RM830 million (FY Dec 2009: RM689 million). For the same period, the Bank achieved a return on equity of 22% and a return on assets of 1.8% – exceeding the Malaysian banking industry’s respective averages of 16.5% and 1.5%. UOBM is well poised to benefit from the trend of rising interest rates this year, given that about 95% of its financing facilities bear floating rates.
RAM Ratings notes the financial flexibility and support UOBM derives from its parent, Singapore-domiciled United Overseas Bank Limited (UOB Singapore). Such support is expected to be readily extended if needed, as UOBM is key to UOB Singapore’s strategy of becoming a strong regional bank. The 1-notch differential between UOBM’s AA1 long-term financial institution rating and the AA2 rating of its Subordinated Bonds reflects the subordination of the debt facility to the Bank’s senior unsecured obligations.
(603) 7628 1163
Published on 13 June 2011
RAM Ratings has reaffirmed the respective enhanced long- and short-term ratings of AA1(s) and P1(s) for F&N Capital Sdn Bhd’s (F&N Capital) RM1 billion Commercial Papers/Medium-Term Notes Programme (2008/2015) (CP/MTN); the long-term rating has a stable outlook. F&N Capital is a treasury company that is wholly owned by Fraser & Neave Holdings Bhd (F&N Holdings or the Group). The CP/MTN’s enhanced ratings are based on the credit-risk profile of F&N Holdings, the provider of the unconditional and irrevocable corporate guarantee on the CP/MTN.
The reaffirmed ratings reflect F&N Holdings’ leading position in several food-and-beverage (F&B) business segments, strong balance sheet, robust cashflow-protection measures, diversified product range, modest geographical presence, expansive distribution channels and stable product demand. The ratings are, however, moderated by the more competitive and challenging landscape in the F&B market, the Group’s exposure to fluctuating raw-material and packaging costs, and the licence-renewal risk for brands not owned by F&N Holdings or its parent company, Fraser and Neave Limited.
As the Group’s manufacturing and distribution of products under licence from The Coca-Cola Company (TCCC) is coming to an end in September 2011, the financial performance of F&N Holdings’ soft-drinks division is envisaged to soften, particularly in FYE 30 September 2012 (FY Sep 2012).
TCCC products account for some 12%-16% of the Group’s sales and operating profit before interest and tax (OPBIT). “As more TCCC products are expected to be introduced in the local market, along with new launches from other producers, the soft-drinks sector is expected to become more competitive. Likewise, F&N Holdings’ peers in the dairy-products market have been actively expanding their market shares. Due to the capacity limitations of the Group’s dairy plant in Petaling Jaya, it has not been able to respond to such competition, thereby allowing its rivals to gain market share,” notes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.
Nonetheless, F&N Holdings’ capacity constraints are expected to be resolved upon the commencement of its dairies plant in Pulau Indah. Coupled with its plans to continue launching new products (both in the dairies and soft-drinks markets), the Group is envisaged to stay dominant in these sectors.
To further strengthen its foothold in the F&B market, F&N Holdings is on the lookout for potential acquisition targets, both domestic and regional. While acquisition targets have yet to be identified, the Group has budgeted around RM500 million for such investments over the next 2 years, besides RM564 million of capital expenditure (capex) for the next 3 years.
“The decline in financial performance, potential increase in debt level to fund its planned capex and budgeted cash outflow for potential acquisitions are expected to thin F&N Holdings’ funds from operations debt cover to 0.40 times in FY Sep 2012, before it recovers to 0.60 times the following year. Nevertheless, the Group’s balance sheet is expected to remain sturdy, with a net gearing ratio of 0.4 to 0.5 times over the next 3 years,” opines Kevin Lim.
Low Pui San
(603) 7628 1051
Wednesday, June 8, 2011
Published on 07 June 2011
RAM Ratings opines that the proposed acquisitions by Genting Berhad’s (Genting or the Group) indirectly owned subsidiary - Bayfront 2011 Property, LLC (Bayfront) - in Miami, Florida, will have no immediate impact on the Group’s credit profile. Genting’s respective long- and short-term corporate credit ratings currently stand at AAA and P1 while the RM1.60 billion Medium-Term Notes Programme (2009/2024) of its wholly owned GB Services Berhad carries an enhanced issue rating of AAA(s), backed by an unconditional and irrevocable corporate guarantee from Genting. Both long-term ratings have a stable outlook.
On 27 May 2011, Genting announced that Bayfront had entered into a sale and purchase agreement with The McClatchy Company and Richwood, Inc to acquire approximately 13.9 acres of freehold waterfront properties in downtown Miami; these include an office-cum-warehouse building (known as the Miami Herald Building) and land for USD236 million (approximately RM710 million) in total.
RAM Ratings is of the view that the proposed acquisition has no impact on Genting’s credit profile given the size of the asset acquisitions vis-à-vis the Group’s strong balance sheet and enviable cash hoard. “Genting’s consolidated cash amounted to RM15.46 billion as at end-March 2011. Although the purchase consideration will be largely debt-funded, we expect Genting’s cashflow-protection measures to remain strong at around 0.50 times (annualised 1Q FY Dec 2010: 0.67 times). This is backed by its stable contribution from Resorts World Genting (RWG) as well as higher-than-expected contribution from Resorts World Sentosa (RWS).” elaborates Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.
The proposed acquisition is expected to pave way for the Group’s proposed development of Resorts World Miami (RWM) over the medium to long term. This represents Genting’s second venture in the United States, after its New York’s video lottery facility – Resorts World New York (RWNY), which is slated to open in 2H 2011. The initial master plan for Resorts World Miami will include mixed developments such as hotels and convention as well as entertainment centres. We note that if Genting were to proceed with the proposed development on a big scale without gaming operations, the corresponding return on investment is envisaged to be lower than that of its existing integrated resorts with gaming operations such as RWS and RWG. As a result, RWM may not be a major contributor to the Group’s earnings. RWM would also need to compete with existing renowned resorts in Miami.
However, we do not discount the possibility that Genting may expand its gaming operations should Florida’s gaming industry be liberalised and the development of large-scale destination resorts with gaming facilities be allowed. All said, RAM Ratings will reassess the impact of the proposed development on the Group’s credit profile upon greater clarity on the proposed development plans.
Tuesday, June 7, 2011
MARC AFFIRMS ITS AAA RATING ON CAGAMAS MBS BERHAD’S RM1,555 MILLION ASSET-BACKED FIXED RATE SERIAL BONDS (CMBS 2004-1); OUTLOOK STABLE
Jun 6, 2011 -
MARC has affirmed the AAA rating of Cagamas MBS Berhad’s (Cagamas MBS) asset-backed fixed rate serial bonds of RM1,555.0 million (CMBS 2004-1) with a stable outlook. The rating action affects the outstanding Series 3 and Series 4 of CMBS 2004-1, totaling approximately RM635.0 million. The transaction’s affirmed rating reflects strong credit enhancement levels for the outstanding bonds, supported by a collections account balance of RM408.5 million and the outstanding principal of non-defaulted mortgages of RM629.8 million. The collateral pool, which comprises highly seasoned mortgage loans of high credit quality, continues to show stable performance. The affirmed rating also benefits from satisfactory management of collateral servicing and transaction administration.
Cagamas MBS is a limited purpose entity and a wholly-owned subsidiary of Cagamas Holdings Berhad (Cagamas Holdings) whose principal activities are restricted to securitising government staff housing loans (GSHLs), originated under both Islamic and conventional principles, from the Government of Malaysia (GOM), by issuing asset-backed securities. The collateral backing this transaction is a pool of eligible GSHLs (Portfolio 2004-1) granted to government pensioners and serviced by direct deductions from the borrowers’ pension accounts. The GOM’s Housing Loans Division, or Bahagian Pinjaman Perumahan (BPP), is the servicer of Portfolio 2004-1.
Based on Cagamas’ quarterly servicer report for Portfolio 2004-1 dated April 20, 2011 (the reporting date), the outstanding mortgage portfolio comprised 37,382 fixed-rate mortgages with an outstanding pool balance of RM638.8 million, compared to the portfolio’s position at issuance represented by 68,396 fixed-rate mortgages worth RM1,935.7 million in total. The transaction’s credit enhancement level has risen further since MARC’s last review in October 2010 to 168.9% for the RM635.0 million outstanding bonds. The substantial credit enhancement level is attributed to the strong performance of the collateral pool, which continues to register a low cumulative default rate of 0.46% versus MARC’s 5.53% assumed cumulative default rate. The stable performance of the collateral pool benefits from its weighted average seasoning factor of 17.9 years. The majority of defaults as of the reporting date arose due to causes which are administrative in nature, including delays in notification of borrowers’ deaths and pending MRTA insurance claims. MARC considers mortgages in arrears for nine months or more as defaults and mortgages in arrears for less than 9 months as delinquencies. At the reporting date, total delinquent mortgages constituted 1.7% of the initial mortgage pool balance.
MARC’s cash flow analysis on the transaction demonstrates that the bonds can still be adequately serviced under ‘AAA’ high-stress default scenarios, with support from available funds in the Collection Account which will more than cover the scheduled redemption of RM290.0 million of Series 3 bonds maturing on October 20, 2011. The analysis has also considered low and high prepayment scenarios, within which the mortgage pool’s cumulative prepayment rate of 17.09% falls. Cagamas MBS may exercise the option to partially redeem Series 4 of CMBS 2004-1 on the next scheduled redemption date on the condition that RM66 million remains in the Collection Account post redemption.
MARC’s stable outlook for CMBS 2004-1 is premised on the stable performance of the transaction’s collateral pool and its high collateralisation ratio which allows the bonds to withstand a large increase in mortgage defaults and loss rates. MARC considers the risk of shortfalls arising from unexpectedly high prepayments to be well mitigated by CMBS 2004-1’s sizeable accumulated liquidity reserves.
Friday, June 3, 2011
These reports give an instant snapshot on the performance of our key bond indices in an easy-to-read and understand format. These reports are also accessible on our Commentary & Research pages under "BPAM Research -> BPAM Bond Index Reports"
Thursday, June 2, 2011
RAM Ratings closely monitoring outcome of negotiation talks on potential merger between RHB Capital and CIMB/Maybank
Published on 01 June 2011
On 31 May 2011, Malayan Banking Berhad (which holds AAA/Stable/P1 financial institution ratings) and CIMB Group Holdings Berhad (which carries AA1/Stable/P1 corporate credit ratings) announced that they had each received approval from Bank Negara Malaysia to separately commence talks with RHB Capital Berhad (RHB Capital) and its substantial shareholders for a possible merger of their respective businesses. RHB Capital is the ultimate parent company of RHB Bank Berhad, RHB Islamic Bank Berhad and RHB Investment Bank Berhad (all rated AA2/Stable/P1 by RAM Ratings), and is currently the fifth-largest banking group in Malaysia.
We will closely monitor the outcome of these negotiations and will make further rating announcements as and when sufficient details are made known. In assessing the merits of a potential merger, RAM Ratings will take into consideration business synergies, as well as acquisition costs and their associated funding and capital structures.
Wednesday, June 1, 2011
Published on 01 Jun 2011
RAM Ratings expects the electricity tariff hike (effective today) to have a largely neutral impact on Tenaga Nasional Berhad (TNB or the Group). Given that the rise in tariffs will be offset by the higher price of gas payable to Petroliam Nasional Berhad (Petronas), TNB’s key financial metrics, i.e. margin on operating profit before depreciation, interest and tax and funds from operations debt coverage ratio, are likely to be unaffected by this move.
The Government has granted TNB an average 7.12% increase in electricity tariffs of which 5.12% is to recover the Group’s additional fuel expenditure based on the higher price of gas from Petronas, which will be elevated from RM10.70 per million metric British thermal units (mmBtu) to RM13.70 per mmBtu while the remainder 2% is to partly recover the higher operating costs since June 2006.
Nevertheless, any pressure on TNB’s margins will likely be exerted by rising coal prices. As coal is procured at international prices, the Group remains vulnerable to unfavourable movements in coal prices and/or foreign-exchange rates. The newly revised tariffs are still based on a coal price of USD85 per metric tonne (MT) even though the Group’s average coal procurement price is higher. We expect TNB’s average coal price to come up to USD120 per MT in FYE 31 August 2011. Nevertheless, the stronger ringgit against the US dollar may help moderate negative effects of its heftier coal-powered generation costs. On this note, a fuel-cost pass-through (FCPT) mechanism will also be introduced under which TNB’s fuel costs will be reviewed every 6 months to allow the electricity giant to pass on increases in fuel prices (i.e. gas, coal and oil). By the same token, TNB will also – under the FCPT mechanism – pass through any savings from a retracement in fuel costs to consumers. While the implementation of the FCPT mechanism will allow the utility company to mitigate the impact of fluctuating fuel costs, any tariff adjustment then remains to be seen.