MARC AFFIRMS ITS RATINGS ON ABS LOGISTICS BERHAD’S RM160 MILLION ASSET-BACKED SENIOR SUKUK IJARAH; OUTLOOK REVISED TO NEGATIVE

Feb 27, 2012 -

MARC has affirmed the ratings of ABS Logistics Berhad’s (ALB) Senior Sukuk comprising RM100 million of Class A, RM20 million of Class B and RM40 million of Class C Sukuk at AAAIS, AAIS and AAAIS(bg) respectively. The outlook on the ratings for the Class A and B Sukuk has been revised to negative from stable. The revision in outlook reflects increasing concerns over the credit profile of the transaction’s originator and lessee, Tiong Nam Logistics Berhad, due to its weakening financial performance in a highly competitive business environment. The negative outlook affects RM140 million outstanding under the sukuk. The ratings of the Class A and Class B Sukuk reflect satisfactory loan-to-value (LTV) ratios for the sukuk, strong debt service coverage levels, and the stable performance of the collateral properties. Meanwhile, the enhanced rating of the Class C Sukuk is based on the unconditional and irrevocable guarantee from Malayan Banking Berhad on which MARC maintains a financial institution rating of AAA/stable based on public information.

ALB is a bankruptcy remote special purpose vehicle incorporated to facilitate the issuance of the sukuk and the sale and leaseback of industrial warehouses (the collateral pool) by Tiong Nam Logistics Holdings Berhad (Tiong Nam) and its subsidiaries. The monthly lease or ijarah payments form the source of profit payments on the rated Sukuk and principal repayment of the amortising Class A Sukuk. The collateral pool comprises 22 industrial warehouses acquired from Tiong Nam and its subsidiaries and leased back to Tiong Nam Logistics Solutions Sdn Bhd, a wholly-owned subsidiary of Tiong Nam, for a period of up to 10 years. Located in established industrial areas across seven states in Peninsular Malaysia, the warehouses were last valued in April 2011 at RM178.5 million collectively.

As of March 31, 2011, the collateral pool showed a healthy collective occupancy rate of 93.8% and continues to be supported by a stable base of major tenants involved in manufacturing-based and logistics- and transportation-based industries. MARC notes that a substantial number of these tenants have been customers of Tiong Nam for over 10 years, reflecting the captive linkages of Tiong Nam’s warehousing and transportation services. This, and the prime locations and quality of the collateral properties continues to mitigate lease renewal risks with respect to the leases, which are generally short-termed in nature – the average tenure of leases in the collateral pool is currently 1.39 years. At the same time, the highly concentrated tenant profiles of the collateral properties render the pool performance more susceptible to non-renewal of leases by major tenants and adverse changes in the creditworthiness of these tenants. The collateral pool’s five largest tenants now account for over 55.9% of annual gross rental revenue and a substantial number of its tenants are exposed to manufacturing-based industries, particularly the electronics and electrical sector.

During the period under review (April 2010 to March 2011), the collateral pool showed a healthy net operating income (NOI) of RM16.0 million and was able to comfortably meet all required ijarah payments of RM14.4 million in total with a gross revenue. Based on existing leases held and an average monthly rental rate of RM1.35 per sq ft, MARC expects the collateral pool to generate an NOI of RM16.0 million in the next year, against the assumed sustainable NOI of RM14.5 million. In the same period, ALB had successfully redeemed RM5.0 million of Class A sukuk on May 8, 2011, leaving the outstanding amount at RM80.0 million. As such, the respective loan-to-values (LTV) for the Class A and Class B Sukuk are 55.4% and 69.2% based on MARC’s maintained discounted cash flow valuation of the collateral pool of RM144.5 million; however, projected LTVs at maturity for the sukuk remains unchanged at 27.7% and 41.5%. MARC’s computed debt service coverage ratios (DSCR) for the Class A and Class B Sukuk, respectively of 3.61 and 3.31 times, remain within the rating requirements for the rating levels.

Tiong Nam’s recent operating performance has been notably affected by increases in fuel, rental and labour costs, despite an uptrend in its revenue. The group’s profit after tax of RM28.8 million for FY2011 was primarily contributed by increases in fair values (almost RM31.2 million) of its investment properties as opposed to revenue from logistics services and warehousing income. The group posted negative cash flow from operations (CFO) of RM11.9 million compared to a positive CFO of almost RM23.0 million in the previous year. Tiong Nam’s debt-to-equity (DE) ratio was maintained below 1.0 time at 0.61 times, despite an increase in total borrowings during FY2011, due in part to gains taken to revaluation reserves.

For the period ended September 30, 2011 (1HFY2012), Tiong Nam’s financial performance remained depressed as reflected by a pre-tax loss of RM4.5 million for the six-month period. In the same period, the group recorded an operating cash flow deficit of RM3.3 million. In addition, its DE ratio rose to 0.80 times due to additional borrowings. MARC understands that the group is in the process of raising its freight rates to counter the increase in costs.

Further negative rating pressure could develop with respect to the ratings of Class A and Class B sukuk if Tiong Nam’s credit profile becomes further stressed. Rating sensitivity of Class A and Class B sukuk is currently limited by the still favourable performance of the collateral properties.

Contacts:
Ruben Khoo Sheng Luen, +603-2082 2265/ rubenkhoo@marc.com.my ;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my .

MARC SUSPENDS ITS RATING ON TRINITY CORPORATION BERHAD (FORMERLY KNOWN AS TALAM CORPORATION BERHAD)

Feb 27, 2012 -

MARC has suspended its B+ID rating on Trinity Corporation Berhad's (Trinity) Settlement Bithaman Ajil Islamic Debt Securities (Settlement BaIDS) following Trinity’s failure to provide important information for the rating agency to carry out its rating surveillance. The outstanding amount of the Settlement BaIDS stands at RM98.2 million as of February 24, 2012.

MARC is unable to carry out its rating surveillance in the absence of Trinity’s business plans, in particular its asset divestment plans, proceeds from which are expected to fund its payment obligations for the Settlement BaIDS. The rating agency may reinstate the suspended rating if the information required becomes available. Alternatively, MARC will likely withdraw the rating within the next 90 days if the requested information is not forthcoming.

Contacts:
Thian Chow Di, +603-2082 2280/ chowdi@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .

MARC AFFIRMS ITS RATING OF AAA ON CAGAMAS BERHAD; OUTLOOK STABLE

Feb 27, 2012 -

MARC has affirmed its AAA/AAAID and MARC-1/MARC-1ID ratings on Cagamas Berhad’s (Cagamas) Conventional and Islamic Medium Term Note Programme of up to RM40 billion (MTN Programme) and its Conventional and Islamic Commercial Paper Programme of up to RM20 billion (CP Programme) respectively. MARC has also affirmed its MARC-1ID and AAAID ratings on Cagamas’ Islamic Commercial Paper Programme (ICP Programme) and Islamic Medium Term Note Programme (IMTN Programme) with a combined aggregate limit of RM5 billion. The long-term ratings carry a stable outlook. The ratings factor in Cagamas’ very strong asset quality, stable earnings profile and its strong capitalisation.

Cagamas was established in 1986 to promote home ownership and the growth of the secondary mortgage market in Malaysia. Cagamas purchases mortgages from banks and other originators and funds them through the issuance of conventional and Islamic debt securities. While Cagamas remains one of the country’s largest private debt issuers, its footprint in the mortgage market has been reduced in recent years as a result of banks’ decreased dependence on the national mortgage corporation to provide liquidity to the secondary mortgage market. Consequently, Cagamas has broadened its activities beyond its original objectives as the national mortgage corporation and expanded its asset portfolio to encompass non-mortgage related asset classes such as hire-purchase debts and Islamic personal financing. MARC takes comfort from the robust risk management framework and sound corporate governance the company has established to meet new or additional risks associated with changes in business activities.

As at June 30, 2011, Cagamas’ mortgage and financing portfolio amounted to RM20.5 billion (FY2010: RM20 billion) on its balance sheet, of which 69% was accounted for by housing loans. Cagamas uses recourse arrangements with banks and originators to lay off the credit risk of acquired mortgages and financing. Mortgages and financing acquired under its Purchase With Recourse (PWR) scheme were valued at RM9.9 billion at end-1H2011 (FY2010: RM11.1 billion). Meanwhile, mortgages and financing acquired under its Purchase Without Recourse (PWOR) scheme stood at RM10.5 billion as at end-June 2011. Cagamas’ exposure to credit risk for its PWOR assets is mitigated as repayments on any relevant mortgage or financing are made through deductions at source. Defaults in Cagamas’ mortgage and financing portfolio have been historically low. At end-1H2011, defaulted loans and debts under its PWOR scheme remained modest at 0.64% as a percentage of its gross receivables (FY2010: 0.66%) while repurchase activity due to default of its PWR assets remained low at 0.9% of total PWR assets during the first six months of 2011 (FY2010: 1.8%). In addition to the low credit risk profile of mortgages and financing acquired, MARC notes that the originators of the majority of its PWR assets are financially strong institutions rated AA and above.

During the first six months of 2011 (1H2011), Cagamas purchased only RM636 million in loans and debts compared to RM6.1 billion for the full year of 2010; of this, 91% were purchased under its PWR scheme and the remaining 9%, under its PWOR scheme. This trend of lower mortgage and refinancing acquisition activity is likely to persist into 2012 given the uncertainty in the current economic and financial environment and associated implications for new mortgage and personal financing originations.

Cagamas has largely sustained its earnings performance in 1H2011 with a half-year net profit of RM120.3 million compared to RM240.7 million for the full year 2010 amid a slight moderation in its net interest income. Income from its Islamic operations has also held up relatively well at RM55.6 million. MARC expects Cagamas to continue to exhibit good profitability, supported by low credit costs and stable net interest margins. The rating agency also expects Cagamas to keep costs under control, noting that the cost-to-income ratio was up slightly at 11.7% in 1H2011 from FY2010’s 11.0%.

MARC views Cagamas’ capitalisation to be very strong relative to its risk profile, with its core capital and risk-weighted capital ratios of 20.1% and 20.8% respectively as at end-FY2010. Its capital buffer is expected to remain strong in light of its earnings retention and the generally muted outlook for risk-weighted assets growth. Meanwhile, Cagamas’ favourable access to the domestic debt market and its demonstrated ability to structure its liabilities to match its mortgage and financing assets remains key positives for its liquidity and funding management.

The stable outlook on Cagamas’ ratings is underpinned by its steady financial metrics, good capitalisation and strong support framework. MARC opines that support in the unlikely event of need is likely to be extended by the government, considering Cagamas’ status as one of the country’s largest private debt issuers and Bank Negara Malaysia’s ultimate 20% shareholding.

Contacts:
Sakinah Mohd Ali, +603-2082 2272/ sakinah@marc.com.my ;
Milly Leong, +603-2082 2288/ milly@marc.com.my .

Market conditions unfavorable for Arcapita (By IFN)

See: http://redmoney.newsweaver.co.uk/1xp61kebipyh38rwoni3wx?email=true&a=6&p=21794885&t=20763715

BAHRAIN: Faced with a looming debt deadline on the 28th March, market players are doubtful that Arcapita Bank, the Bahrain-based Islamic private equity investment firm, will be able to meet its repayment by the due date. With US$1.1 billion in loans maturing next month, and another US$2.1 billion maturing in January 2015, Arcapita Bank whose shareholders are mainly wealthy Gulf nationals is clearly strained financially.

Despite escaping default in 2010, along with Unicorn Investment Bank, many industry players admit the bank’s current position is shaky due to unfavorable economic conditions; particularly in the private equity market. Speaking to Islamic Finance news, Khalid Howladar, regional team leader / senior credit officer for GCC financial institutions, asset-backed and Islamic finance at Moody's revealed: “Arcapita faces a very tight funding environment, and its European lenders have very low appetite for risk given their own capital needs and their high costs in providing dollar funding. Private equity investments are currently very illiquid and this makes it difficult for them to exit and raise cash without taking losses.”

The bank is already in talks with its mandated advisors ahead of the March deadline, comprising of The Royal Bank of Scotland (RBS), Rothschild, KPMG and Linklaters; as well as PwC and Clifford Chance who have been appointed by RBS.

Arcapita, which has real estate investments in Bahrain and Dubai is also actively involved in the European and American markets, owning a portfolio of groups in these countries including the UK rail company Freightliner, Irish utilities group, Viridian and US apparel retailer J Jill. However, Khalid believes that the bank’s international exposure is still too minimal to counter its weak domestic performance. He said: “While Arcapita is geographically well diversified outside of Bahrain, it still operates in a weakened difficult domestic environment.”

Arcapita’s loans have recently seen a dip in trading at 60 US cents on the dollar in the secondary market, due to growing concerns amongst investors about a potential default. Naji Nabaa, the associate director of fixed income sales at Dubai-based investment bank Exotix said: “It is trading down because people are concerned that they have waited a long time and the company hasn’t come up with anything. Now we are getting close to maturity.”
Despite this, investors and lenders are still maintaining optimism that the bank will successfully launch a restructuring exercise in time. However, some reports have revealed that hedge funds who have been buying small chunks of the bank’s debt could potentially upset the apple cart by pursuing more aggressive options, and inevitably push the bank towards liquidation.

Arcapita Bank was one of the first Shariah compliant investment boutiques to crop up in the late 90s alongside The Investment Dar and Gulf Finance House, as a result of the boom in oil prices in the GCC. At the time, private sector investments were dominated by real estate and infrastructure — highly attractive options for Islamic investors

MARC AFFIRMS ITS AAAID(S) RATING ON KUCHING PORT AUTHORITY’S RM180.0 MILLION BaIDS

Feb 28, 2012 -

MARC has affirmed the AAAID(S) rating on Kuching Port Authority’s (KPA) RM180.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) with a stable outlook. The rating is aligned to MARC’s credit rating of the Sarawak State Government on the basis of a letter of support from the Sarawak State Government (SSG) for the BaIDS. The rating also reflects the sufficiency of contingency arrangements for the provision of liquidity in the form of committed back-up credit facilities and the covenanted requirement for the state-owned port authority to notify the State Financial Secretary to provide funding support for debt service after the credit facilities have been fully drawn. The rating on the BaIDs would be affected by a change in the credit quality of the state of Sarawak and/or a weakening of SSG’s support.

The rating on Sarawak reflects the state’s strong financial position, rich natural resources and fairly strong financial management practices. The government’s financial position remains adequate with a sustained surplus of RM3.3 billion in 2009, albeit lower than the preceding year’s RM5.2 billion due to a decline in revenue collection in 2009 and a sharp 31% fall in non-tax revenue. Expenditure remains stable with total outlays amounting to RM1.3 billion in 2009 against the RM1.2 billion incurred in the preceding year. However, MARC considers the Sarawak economy to be somewhat vulnerable to a downturn in the export of its natural resources. A further decline of commodity prices from current levels may weaken Sarawak’s economic growth in line with a global slowdown as global growth is expected to moderate from 5.1% in 2010 to an estimated 4.0% in 2011 and 2012 respectively, according to IMF forecasts.

KPA is a statutory body under the purview of the Sarawak State Government which manages and operates import and export activities through Kuching Port. Kuching Port mainly serves Kuching, the capital of Sarawak, due to geographical limitations and its location at the river mouth near the city. As such, it is the second busiest port in Sarawak in terms of cargo volume handled per year and generally caters to exports of manufactured goods and imports of consumer goods. As such, cargo volume is dependent on the state’s economic growth and typically driven by higher consumer spending power due to the lack of proximity to major industrial zones.

As such, in line with the recovery of the state’s economy which grew 5.4% (2009: -1.3%), for the financial year ended December 31, 2010, KPA’s revenue grew 12.4% to RM55.4 million (2009: RM49.3 million). Cargo throughput in 2010 rebounded to 8.12 million tonnes, a growth of 17.3% after it contracted 8.3% in the preceding year. In line with the higher revenue, KPA’s profits grew to RM7.0 million (2009: RM1.0 million) while its cash flow from operations (CFO) improved to RM31.6 million (2009: RM20.0 million). The financial improvements were in part due to better operating efficiencies after KPA outsourced operations of its port to third parties and significantly lowered financial costs in the last five years.

For the eight month period ending August 31, 2011 (8M2011), KPA continued to record improvements in its cargo throughput with total cargo handled of 5.64 million tonnes. Revenue and pre-tax profit in 8M2011 was RM44.8 million and RM6.3 million respectively and KPA’s results appear to be in line to surpass its previous year’s results. KPA also recorded CFO of RM20.1 million and free cash flow of RM17.7 million in 8M2011 indicating a stable liquidity position for 2011. During 2011, KPA secured an additional credit facility from Public Bank Berhad after drawing down RM17 million from its previous credit facility from CIMB Bank Berhad and MIDF Amanah Investment Bank Berhad. Looking at the company’s available cash balance of RM19.6 million as at 8M2011 and its scheduled repayment of RM30 million in December 2012, MARC believes that KPA will utilise its available credit lines to meet its debt obligations.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my ;
David Lee, +603-2082 2255/ david@marc.com.my ;
Jason Kok, +603-2082 2247/ jason@marc.com.my .

G20 finance ministers ask eurozone to boost rescue fund (By BBC)

See: http://www.bbc.co.uk/news/business-17175485

Eurozone countries need to put more money in their rescue fund before G20 nations can step in to help them, the G20 finance ministers have said.

They said such a move was "essential" to their decision to provide more resources to the International Monetary Fund (IMF) to help the region.

Earlier this month, eurozone leaders set up a permanent bailout fund of 500bn euro ($673bn; £420bn).

There are concerns the fund may not be able to rescue a deeply indebted state.

"We have to see the colour of the eurozone's money first - and quite frankly, that hasn't happened," the British chancellor George Osborne said.

"Until it does, there's no question of extra IMF money from Britain or probably anyone else."

WEEKLY ECONOMIC COMMENTARY, 26 FEBRUARY 2012 (By DIFC)

See: http://www.difc.ae/difc-blogs/weekly-economic-commentary-february-26-2012

Eurozone’s backing for the Greek debt deal failed to stimulate the markets much; but, positive data released helped US stocks reach the highest level since 2008 while Asian markets rallied. Regionally, the Abu Dhabi and Saudi markets hit 5-month and 3-year highs respectively last week, boosted by recent oil price trends and improved global sentiment. Among currencies, euro gained to reach a 11-week high against the dollar while the yen was at a 7-month low. Oil surged to a nine-month high after an unsuccessful IAEA visit to Iran, while gold prices also rose, despite dollar’s weakness.

The deal over the debt restructuring in Greece and the second bailout program were not mistaken as the end of the ordeal, like happened in previous occasions. The notion that there is no silver bullet for a crisis of such magnitude in Euroland is probably the most positive outcome of the process so far. The data flow confirmed that the slowdown spread to Asian economies at the end of 2011, although policymakers in the region have more ammunition and fiscal space to revive growth.

RAM Ratings reaffirms ratings of PINS Capital's ICP/IMTN Programme, revises outlook to negative

Published on 23 February 2012
RAM Ratings has reaffirmed the respective long- and short-term ratings of PINS Capital Sdn Bhd’s (“PINS Cap” or “the SPV”) RM150 million Islamic Commercial Papers/Medium-Term Notes Programme (“ICP/IMTN Programme”), at AA3 and P1. Nonetheless, the outlook on the long-term rating has been revised from stable to negative.

The ratings of PINS Cap’s ICP/IMTN Programme hinge on the credit strength of its counterparties, i.e. cellular operators (“celcos”), which lease the telecommunication infrastructure facilities (“towers”) from Perak Integrated Network Services Sdn Bhd (“PINS”) in exchange for pre-determined monthly licence fees. By virtue of this, RAM Ratings had adopted the weakest-link approach when rating PINS Cap’s debt facility; the ratings reflect those of the SPV’s lowest-rated counterparty. On 23 December 2011, RAM Ratings revised the outlook on the debt ratings of Binariang GSM Sdn Bhd (“BGSM” – the parent company of Maxis Berhad), from stable to negative, reflecting the decline in the BGSM Group’s financial profile over the last few years. In line with the weakest-link approach, we had concurrently revised the outlook on the long-term rating of PINS Cap’s ICP/IMTN Programme, from stable to negative.

PINS Cap – a wholly owned subsidiary of PINS – had been specifically set up for the sole purpose for its parent’s financing needs. Via its licence as a network facility provider – expiring on 10 July 2015 – PINS has the right to construct, own, maintain and lease all towers in the state of Perak. In June 2006, PINS signed a Licence Agreement (“LA”) with the celcos – Maxis Broadband Sdn Bhd (a wholly owned subsidiary of Maxis Berhad), Celcom Axiata Berhad and DiGi Telecommunications Sdn Bhd – for the purpose of constructing and leasing the towers, in exchange for pre-determined monthly licence fees. The LA is, however, not a commitment on the number of towers to be built or any minimum payment to PINS, nor is it exclusive, i.e. the celcos may enter into similar agreements with any third party, share/build towers with any other party, and/or build their own infrastructure.

Aside from the celcos’ credit strengths, the ratings also consider PINS’s favourable business profile given the stable income derived from the towers. Moreover, the SPV is shielded from demand and construction risks given that all issuances under the ICP/IMTN Programme have to be evidenced by the completion and handover of towers. Notably, the risk of cashflow leakage is minimised by the debt facility’s transaction structure, which involves the setting up of a Collection Account (“CA”), into which the celcos will be instructed to remit all monthly proceeds in relation to each tower. Then, 60% of the money in the CA will be deposited into the Sinking Fund Account that has been earmarked for the servicing of PINS Cap’s debt obligations; the remaining 40% will be paid into the Operating Account for the purpose of funding the maintenance and operating expenses of the towers.

Meanwhile, PINS Cap remains exposed to roll-over and interest-rate risks. The roll-over risk is adequately addressed via the unutilised underwritten amount of RM30 million against the current outstanding amount of RM10 million under the ICP/IMTN Programme (as at end-January 2012). Comfort can also be derived from the knowledge that the interest rates payable on the amount drawn down have been within our expectations. Going forward, there will be no further drawdown as the issuance time frame under the ICP/IMTN Programme expired on 14 June 2011.

Media contact
Adelia Abdul Rahim
(603) 7628 1055
adelia@ram.com.my

Islamic finance makes headway in Arab Spring countries (By IFN)

GLOBAL: A year on from the Arab Spring, prospects for Islamic finance to play a role in the rebuilding of affected countries has gathered pace; even as the countries continue to grapple with the impact of the uprisings.

The industry’s progress in the MENA countries has been especially marked in the first two months of this year. Markets such as Libya have announced the establishment of a Shariah compliant fund; the Libyan Foreign Bank said that it will offer Islamic banking services in tandem with the completion of the country’s Islamic finance regulations next month; Tunisia is looking to team up with the IDB to strengthen its banking sector, especially in Islamic banking; and the Yemeni government has announced plans for a sovereign Sukuk sale.
Furthermore, while Egypt has seen speed bumps in its effort to launch Islamic bonds due to uncertainty over the country’s financial system, optimism remains that the Islamic financial industry has a major role to play in the recovery of the Arab Spring countries as a whole.

In Syria, Islamic banks have grabbed the spotlight as the banking industry braces for a tough year ahead amid continuing political bedlam. Privately-owned Islamic bank Chambank’s net profits soared by 533% in 2011; while Qatar International Islamic Bank-owned Syria International Islamic Bank reported a 12% rise in pre-tax profit. The strong showing last year may put the banks on a firmer footing for this year; as the banking industry expects to face declining deposits and rising bad debt.

With its positive performance, Syria could emerge as the next country in a long list suffering from political turmoil to tap into Islamic finance to restore itself to its former glory.

Asia Pacific banks can manage impact of Europe crisis, says S&P (By IFN)

GLOBAL: Europe’s debt crisis has raised concerns of creating a global contagion; but its impact on Asia Pacific (APAC)’s banks will be manageable, according to S&P.

The firm, which has downgraded ratings for banks in Europe; including 15 in Spain, said that the interconnected risk between Europe’s sovereigns and its banking system does not have an immediate direct and material impact on APAC bank ratings.

“Currently, the outlooks on 79% of S&P’s APAC bank group ratings are stable; backed by a number of factors including relatively solid growth prospects in the region, good capitalization, strong franchises and stable funding,” it said.

However, it cautioned that should the euro’s debt woes lead to a more severe global recession; this could prompt it to lower its assessment of APAC banks. It could also revise its views on the region’s banks if the industry’s credit profile is impacted by a pronounced global economic slowdown.

“We may also consider negative rating actions if stresses in the Eurozone cause a market dislocation and result in funding difficulties for APAC banks,” it added.

On a positive note, the ratings agency commented that the region’s banks generally have limited investment exposure to euro sovereigns such as Greece, Italy, Ireland, Portugal and Spain. It also noted that while a pullback of lending by European banks in the Asian region could lead to higher credit costs, this could create opportunities for the region’s banks to boost their local and global presence.

Nonetheless, rapid expansion will be constrained as a result of the tough economic landscape; uncertainty regarding the stability of the foreign currency funding market; and higher capital requirements under Basel III, it added.

RAM Ratings assigns AA1 rating to Maybank's proposed debt programme

Published on 22 February 2012

RAM Ratings has reaffirmed Malayan Banking Berhad’s (“Maybank” or “the Group”) long- and short-term financial institution ratings at AAA and P1, respectively. At the same time, the respective issue ratings of Maybank and Cekap Mentari Berhad’s (a subsidiary set up to issue subordinated notes) outstanding debt instruments have been reaffirmed. Concurrently, RAM Ratings has assigned an AA1 rating to Maybank’s proposed up to RM7 billion Subordinated Note Programme (“the Programme”). The proceeds from the issuance of the subordinated notes under the Programme will be used to fund Maybank’s working capital as well as for general banking and other corporate purposes. The subordinated notes will qualify as tier-2 capital of Maybank subject to compliance with the requirements under Bank Negara Malaysia’s guidelines.

Instrument	Rating Action	Rating	Outlook
Malayan Banking Berhad
RM1.5 billion Subordinated Bonds (2007/2017)1	Reaffirmed	AA1	Stable
RM1.5 billion Islamic Subordinated Bonds (2006/2018)1	Reaffirmed	AA1	Stable
Up to RM4.0 billion Innovative Tier-1 Capital Securities (2008/2073)2	Reaffirmed	AA2	Stable
Up to RM3.5 billion Non-Innovative Tier-1 Capital Securities (2008/2108)2	Reaffirmed	AA2	Stable
Up to RM3 billion Tier-2 Capital Subordinated Note Programme (2011/2031)1	Reaffirmed	AA1	Stable
Proposed up to RM7 billion Subordinated Note Programme1	Assigned	AA1	Stable
Notes: 1 The 1-notch rating differential between Maybank’s AAA long-term financial institution rating and the AA1 ratings of its Subordinated Bonds reflect the subordination of the debt facilities to its senior unsecured obligations. 2 The 2-notch rating differential between Maybank’s AAA long-term financial institution rating and the AA2 ratings of its Innovative and Non-Innovative Tier-1 Capital Securities reflect the deeply subordinated nature and the embedded interest-deferral feature of the hybrid instruments.
Cekap Mentari Berhad
Up to RM3.5 billion Subordinated Notes (2008/2038)	Reaffirmed	AA2	Stable
Note: The up to RM3.5 billion Subordinated Notes are part of the up to RM3.5 billion Non-Innovative Tier-1 Capital Securities transaction. Each issue of Capital Securities will be stapled to the Subordinated Notes issued by Cekap Mentari. The Subordinated Notes carry the same rating as the Non-Innovative Tier-1 Capital Securities, given that Maybank’s payment obligations to Cekap Mentari under the inter-company loan – which will be used to pay coupons on the Subordinated Notes – rank pari passu with the Tier-1 Capital Securities.

The ratings reflect Maybank’s significant systemic importance, excellent franchise and sound credit fundamentals. With an asset base of RM431 billion as at end-September 2011, the Group is the largest domestic banking group in Malaysia, and commands the largest share of loans and deposits in the local banking system. Maybank’s asset-quality indicators remained healthy as at end-September 2011 – its gross impaired-loan ratio (“GIL”) had improved to 3.2% (post-FRS 139 restated GIL ratio as at end-June 2010: 4.7%). The Bank’s credit-cost ratio remained low at an annualised 0.2% in the 3-month period ended 30 September 2011 (“3M FY Dec 2011”). 

During the 3M FY Dec 2011, Maybank recorded a pre-tax profit of RM1.8 billion, which translated into an annualised return on assets of 1.7% and return on equity of 21.1%. In the same span, international operations contributed 26% of Maybank’s pre-tax profit. We expect this segment to account for about 30% of the Group’s pre-tax profits in the next 1–2 years, boosted by earnings from its recent acquisition of Kim Eng Holdings Limited (a Singapore-based regional securities and investment-banking group). The management aspires towards a 40% contribution from Maybank’s international operations by 2015.
As Malaysia’s flagship bank, Maybank’s funding capabilities are unrivalled – the Group has a large base of low-cost current- and savings-account deposits. With faster loan expansion than deposit growth over the last 2 years, Maybank’s loans-to-deposits ratio had risen to about 90% by end-September 2011 (end-June 2010: 87%). Going forward, the management seeks to bring this ratio down to about 85%-90%. Maybank’s loans-to-deposits ratio falls within the norms of its larger domestic banking peers, but higher than the industry average of about 78%.

Maybank’s overall capitalisation levels are viewed to be sound relative to its asset quality and profit performance. As at end-September 2011, the Group’s overall risk-weighted capital-adequacy ratio (“RWCAR”) stood at 14.3% assuming that the full electable portion under the Dividend Reinvestment Plan (“DRP”) was paid in cash; on the other hand, if the full electable portion was reinvested in Maybank’s shares, the overall RWCAR would come up to 14.9%. The take-up rate on Maybank’s finalised DRP for FYE 30 June 2011 came up to 86.1%. 

For further details on Maybank’s ratings, please refer to the rationale published by RAM Ratings on 6 December 2011.

Media contact
Shireen Ng
(603) 7628 1021
shireen@ram.com.my

Stock markets mixed on eurozone's Greece bailout (by the BBC)

See: http://www.bbc.co.uk/news/business-17110351

Financial markets have given a mixed reaction to the announcement of a second bailout deal for Greece.

The Dow Jones in New York briefly topped the 13,000 mark for the first time since May 2008 before closing nearly flat, while markets in London, Frankfurt and Paris all fell slightly.

The euro was little changed from Monday's closing price.

Shares across Europe rose on Monday in anticipation of a deal being reached, with bank shares doing well.

Europe's banking industry has been bolstered by support from the European Central Bank.

In the latest bailout deal, Greece is to receive loans worth more than 130bn euros (£110bn; $170bn).

In return, it will undertake to reduce its debts to 120.5% of its GDP by 2020 and accept an "enhanced and permanent" presence of EU monitors to oversee economic management.

Greece needs the funds to avoid bankruptcy on 20 March, when maturing loans must be repaid.

Online forex trading causes a stir (by IFN)

See: http://redmoney.newsweaver.co.uk/1nwr2bd4o7nh38rwoni3wx?email=true&a=6&p=21486915&t=20686815

MALAYSIA: The trading of foreign exchange (forex) has grabbed the spotlight in Malaysia following a ruling by the National Fatwa Council that the practice is haram.

Bank Negara Malaysia (BNM), the central bank, has since issued a statement on the matter, saying that the buying and selling of foreign currency in Malaysia is only allowed with licensed commercial banks, Islamic banks, investment banks and international Islamic banks as provided for under the Exchange Control Act 1953; and with licensed money changers as provided for under the Money Business Act 2011.
“In addition, Shariah compliant financial products, including foreign exchange related transactions, offered and transacted by licensed Islamic financial institutions are approved by the Shariah committee of the respective financial institutions with endorsement from the Shariah Advisory council of BNM,” it said.
According to Dr Abdul Shukor Husin, the chairman of the National Fatwa Council, a study by the committee found that forex trading involves currency speculation, which contradicts Islamic law.

Speaking to Islamic Finance news, Dr Asyraf Wajdi Dusuki, the head of research affairs at the International Shari’ah Research Academy for Islamic Finance, who has written a commentary substantiating the ruling, clarified that the decree only applies to forex trading executed online by individuals.

According to Asyraf, the practice invokes several Shariah issues including leveraging, where individuals trading forex on online are allowed to provide only part of the amount being invested; with the remainder put up by the forex broker. Not only does this allow over-leveraging of up to 100%, but also results in a combination of two contracts; namely the sale and purchase of currency and the provision of credit, which is prohibited by Islamic law.

He added that the sale and purchase of currency, in itself, is subject to its own rules in accordance to Shariah, including that it is limited to spot transactions. Other illegalities include the absence of currencies in-hand when transactions are executed and the emergence of prohibited, as opposed to permissible, risk.
Asyraf also pointed out that at the very base of it, online forex trading platforms have not been authorized or licensed by BNM, making them illegal and hence, in violation of Shariah.

Latest United Kingdom economic statistics

• RICS house price balance in January. House price balance fell 16% month-on-month in December.
• DCLG House Prices in December. Prices fell 0.3% year-on-year in November.
• Consumer Price Index in January. The index rose 4.2% year-on-year in December and was up 0.4% month-on-month.
• Retail Price Index in January. The index rose 4.8% year-on-year in December and edged up 0.4% month-on-month.

Corporate News (17 Feb 2012) - from the Edge

1. Shell Refining posts losses of RM99m in 4Q, RM125m in FY11
   KUALA LUMPUR (Feb 17): Shell Refining Company (Federation of Malaysia) Bhd posted losses of RM99.49 million in the fourth quarter ended Dec 31, 2011 and RM125.74 million in losses for FY11, impacted by weak refining margins.
2. Sarawak Cable scraps transmission lines plan in state
   KUALA LUMPUR (Feb 17): Sarawak Cable Bhd has scrapped the plan to work with Sinohydro Corporation (M) Sdn Bhd and KEC International Ltd to develop transmission lines in Sarawak.
3. KEuro to buy 15.8 pct of West Coast Expressway, raise stake to 80 pct
   KUALA LUMPUR (Feb 17): Kumpulan Europlus Bhd has proposed to raise its stake in West Coast Expressway Sdn Bhd (WCESB) to 80 pct a move to strengthen its control of WCESB after it secured the RM7.07 billion west coast highway concession.
4. Perisai sees 5.87 pct stake crossed off-market
   KUALA LUMPUR (Feb 17): Perisai Petroleum Bhd saw 50 million shares crossed in several off-market deals at an average price of 88 sen on Friday. The 50 million shares represented a 5.87 pct stake.
5. Gas Malaysia listing delayed to 2Q
   KUALA LUMPUR (Feb 17): The listing of Gas Malaysia Bhd on Bursa Malaysia Securities has been delayed again and the listing is now expected to be in the second quarter of 2012.

Economic data for various countries

Canada

• Consumer price index in January. The index rose 2.3% year-on-year and declined 0.6% month-on-month to 120.2 in December.
• Leading indicators in January. The leading indicators rose 0.8% month-on-month in December.

Germany

• Producer prices in January. Prices rose 4% year-on-year in December and was down 0.4% month-on-month.

Hong Kong

• Composite interest rate in January. The interest rate was 0.53% in December.

Singapore

• Electronic exports in January. Exports fell 4.6% year-on-year in December.
• Non-oil domestic exports in January. Exports rose 9% year-on-year in December and jumped 16.4% month-on-month.

United Kingdom

• Retail sales excluding auto fuel in January. Sales rose 1.7% year-on-year in December and edged up 0.6% month-on-month.

MARC AFFIRMS WCT BERHAD’S RATINGS AND MAINTAINS STABLE OUTLOOK

Feb 16, 2012 -
MARC has affirmed its long-term and short-term issue ratings of AA- and MARC-1 on WCT Berhad (WCT) with a stable outlook. A complete list of the ratings and rated issues is provided at the end of this announcement.

The ratings for WCT recognise the group's near-term revenue visibility and its past demonstrated ability to respond to changing market conditions balanced against the business and financial risks posed by the continuing expansion of its investment property portfolio as well as its modest free cash flow retention and the bunching of its debt maturities in 2013. The cyclicality of the group's construction and property development business also continue to constrain the ratings. MARC has not incorporated the potential for receivable impairment charges into the ratings and outlook with respect to the long outstanding construction receivables on WCT's balance sheet which are still the subject of ongoing arbitration. WCT's net exposure in respect of the arbitration stand at RM270.1 million as at September 30, 2011.

WCT reported lower construction segment revenues and profit in the nine months to September 30, 2011 (9MFY2011) compared to the preceding year corresponding period. WCT has posted declining construction revenues since FY2010, as a result of the difficult and competitive environment in the domestic as well as its key overseas construction markets. Its outstanding order book has been characterised by increasing client and geographic concentration; out of five new construction contracts secured in 2010, three accounted for over 90% of the aggregate value of the orders. These include the construction of the RM1.2 billion headquarters for Qatar's Ministry of Interior and the Kuala Lumpur International Airport 2 (KLIA) Integrated Complex. The KLIA 2 Integrated Complex construction works, meanwhile, are being undertaken pursuant to a built-operate-transfer concession awarded to indirect subsidiary Segi Astana Sdn Bhd (Segi Astana) by Malaysian Airport Holdings Berhad. The construction segment's revenue and earnings in 2012 are expected to be sustained by WCT's outstanding order book of RM2.97 billion as of September 30, 2011.

WCT's exposure to the retail property market segment is set to increase further on account of the airport mall to be developed by Segi Astana and operated under the 25-year concession and the Paradigm retail mall that the group is developing in Kelana Jaya which will be a 70:30 joint-venture with the Employees Provident Fund. The long investment horizons associated with the retail properties concerned, the reliance on a considerable amount of project finance debt to fund the construction of the KLIA 2 Integrated Complex and the sensitivity of cash flow generation to tenant quality and occupancy rates could weigh on the group's credit profile should the performance of the investment properties fall short of that which is required to sustain operating cash flows to debt service coverage at current levels. WCT has also committed to provide a fairly significant amount of financial support for Segi Astana during the construction phase and first year of commercial operations which could exert pressure on WCT's credit profile.

Property development revenues for 9MFY2011 showed a marginal increase to RM187.1 million from RM184.5 million for the preceding year corresponding period. However, operating profit fell to RM50.7 million from RM58.1 million. The focus of the group's domestic property development activity continues to be on its Bandar Bukit Tinggi (BBT) township in Klang, and in the Iskandar region where it is developing residential properties under a joint-venture with Iskandar Investment Berhad. WCT recently launched the RM700 million 1-Medini Residences in Iskandar providing revenue visibility for FY2012 in addition to its ongoing development of the third phase of BBT, Bandar Parklands. Meanwhile, Vietnam's weak economic growth outlook and property market sentiments have resulted in the group taking a cautious approach to its property ventures in the country, namely its Platinum Plaza project and mixed residential and commercial development in Ho Chi Minh City. The aforementioned developments in Vietnam should limit the group's exposure to increased near-term economic risks posed by the subdued growth outlook, and high borrowing costs and inflation rates in Vietnam.

For 9MFY2011, WCT posted consolidated revenues and pre-tax profits of RM1.05 billion and RM153.4 million respectively. Its full year profit is expected to come in lower than FY2010's RM257.6 million, mainly on account of its lower construction earnings. Its net cash flow from operations (CFO) rose to RM 96.0 million compared to a deficit of RM60.5 million for FY2011 mostly due to reduced incremental working capital needs during the nine-month period. The cash flow received from the conversion as well as issuance of warrants and share options exercised during the period of RM86.0 million and higher internally generated cash flow supported the RM283.5 million debt pay-down and a RM60.3 million dividend payout during the nine months. WCT's debt maturity schedule appears manageable in FY2012 with RM140.0 million due under its rated facilities against its cash and cash equivalents of RM1.07 billion as of September 30, 2011. However, MARC notes a bunching of debt maturities in the subsequent year with RM500.0 million coming due in FY2013. Drawdowns of project finance debt by Segi Astana are likely to keep the group's consolidated leverage measures at around 1.0 times despite continuing net debt repayments at holding company level.

The stable outlook for the ratings also assumes continuation of the group's prudent debt management and the maintenance of a comfortable liquidity position.

The affirmed ratings are as follows:
• RM300 million Redeemable Sukuk with Warrants at AA-IS;
• RM300 million Islamic Commercial Papers/Medium Term Notes (CP/MTN) at MARC-1ID/AA-ID;
• RM100 million Islamic Fixed Rate Serial Bonds at AA-ID;
• RM100 million Islamic CP/MTN at MARC-1ID/AA-ID.
• RM600 million Fixed Rate Serial Bonds with Detachable Warrants at AA-

Contacts:
Ahmad Gazzara Czillich 03-2082 2259/ gazzara@marc.com.my;
Rajan Paramesran 03-2082 2233/ rajan@marc.com.my.

MARC AFFIRMS ITS RATINGS ON EP MANUFACTURING BERHAD'S RM120.0 MILLION MUNIF/IMTN PROGRAMME

Feb 16, 2012 -
MARC has affirmed its short-term and long-term ratings of MARC-2ID/AID on EP Manufacturing Berhad's (EPMB) RM120 million Murabahah Notes Issuance Facility/Islamic Medium Term Notes (MUNIF/IMTN) Programme with a stable outlook. The rating action affects RM10 million of notes outstanding under the programme.
The affirmed ratings reflect the group’s strong domestic market position as leading Tier-1 vendor of critical safety components to Proton and Perodua and its improved cash flow protection and leverage metrics. At the same time, the agency recognises the moderate technological position of its auto parts business, the inherent cyclicality of the automotive industry and significant customer concentration to which the group is exposed, as well as the potential for greater external competition as a result of auto sector liberalisation.

EPMB, through its subsidiaries, is engaged in the manufacturing of components and parts for the automotive industry, manufacturing and distributing of electronic water meters and the management of water treatment facility. The group’s core business of manufacturing automotive components is undertaken by its now wholly-owned subsidiary, PEPS-JV (M) Sdn Bhd (PEPS-JV). PEPS-JV generates over 80% of its revenue from national automakers Proton and Perodua. As a consequence, its sales performance tracks the unit sales performance of Proton and Perodua. The group’s auto revenue grew 23.3% year-on-year in 2010 due to the brisk sales performance of passenger vehicle models in respect of which EPMB had supplied auto parts and components.

For the nine-month period ended September 30, 2011 (9MFY2011), the group recorded lower revenue of RM408.2 million (9MFY2010: RM455.3 million) mainly due to short-term disruptions to the supply chain brought about by the natural disasters in Japan and Thailand. Domestic passenger vehicle sales had declined marginally by 1% to 450,169 units for the 10 months to October 2011. The group’s profit margin remained resilient at 8.65% despite a loss at its water meter division of RM5.5 million (9MFY2010: loss of RM4.5 million) on revenue of RM12.8 million (9MFY2010: RM14.6 million). With no major capital expenditures, free cash flow was used to pay down scheduled debt maturities, bringing gearing as measured by debt-to-equity (DE) ratio to 0.74 times (x) as at end-9MFY2011 (FY2010: 0.80x), with only RM10.0 million outstanding under the rated programme and due in 2012.

The stable outlook reflects the agency’s expectation that EPMB should maintain sound credit metrics and adequate liquidity to meet its remaining near-term debt maturities under the rated programme.

Contacts:
Sabesh Parameswaran, +603-2082 2260/ sabesh@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

US$2 billion sovereign Sukuk for Egypt? (by IFN)

EGYPT: The government is reportedly preparing to raise around US$2 billion through its first sovereign Sukuk issuance as it seeks to build up declining public funds.
According to Islamic scholar Sheikh Hussein Hamid Hassan, the Egyptian government is convinced that a foreign currency Sukuk will fund the country’s development projects and plug a leak in its foreign reserves, which fell US$1.77 billion to US$16.35 billion in January. The reserves are down by more than 50% since its political revolution a year ago.

“The Sukuk will be in US dollars or Euros; or maybe a combination. It will be around US$2 billion, issued in several tranches targeting mainly Egyptians living outside Egypt,” said Sheikh Hussein.

S&P downgraded Egypt’s ratings to ‘B’ from ‘B+’ on the 10th February as a result of its sharp decline in foreign exchange reserves and its ongoing political uncertainty. “There would be a further downgrade if the Egyptian government failed to stem the decline in reserves, or an uncertain policy environment and weak institutions emerge from the ongoing political transition,” said the ratings agency.
The country’s anxiety over funding has led it to seek US$1 billion from the World Bank and the African Development Bank. According to Momtaz al-Saeed, its finance minister, the country needs US$11 billion to finance economic reform.

Its potential sovereign Sukuk could make up some of the US$2.5 billion-worth of US dollar-denominated bonds said to be for sale by the end of this month.

With the country’s dire need of funds and the Islamist Freedom and Justice Party and the Nour Party set to make up its national coalition government, could Islamic funding emerge as the answer for Egypt’s shrinking coffers?

Latest Japan economic statistics

• Industrial production in December (final). Preliminary readings showed that production fell 4.1% year-on-year in November but rose 4% month-on-month.
• Capacity utilisation in December (final). Preliminary readings showed that utilisation fell 2.9% month-on-month in November.

Latest US statistics

• Retail sales in January. Sales in December edged up 0.1%, following a 0.4% rise in November and 0.7% gain in October.
• The National Federation of Independent Business Small Business Optimism Index in January. The December index rose 1.8 points to 93.8 for a fourth straight monthly advance.
• Import prices in January. Prices dipped 0.1% in December.
• Business inventories in December. Inventories rose 0.3% in November as did business sales, keeping the stock-to-sales ratio unchanged for a fifth straight month at a lean 1.27.

Time to reconsider real estate investing? (By IFN)

2012 could be a good time to reconsider investing in property as prices have moved lower, according to the Bank of London and The Middle East (BLME).
“Across the world, various property markets have seen downward revaluation to a varying extent, for example the US, the UK, Europe and the UAE. There is anecdotal evidence, too, that other firms are seeing niche opportunities in the UK real estate sector with the launch of funds specializing in student accommodation and nursing homes,” it said.

It added that property investment supports taking a long-term view, ideal for strategic asset allocation.

The bank also sees investors taking a safe-haven approach to placing funds; given the emergence of a bear market, especially in the equities market. As such, investors have also looked at gold as an optimal value asset class; although the recent gold run suggests that it is beginning to be overvalued.

“One might conclude that it is now time to invest in equities on that basis, but the current build-up of cash on many corporate balance sheets would indicate there are few profitable investment projects which can be identified at present. If anything, emerging market equities offer superior long-term growth prospects, but bring with them a fairly high level of expected risk, too,” it said.

It also noted that the US dollar Sukuk market finished in positive territory in the fourth quarter of last year, although displaying some volatility. In spite of this, the Islamic bond market showed lower volatility than in the conventional market, it said.

WEEKLY ECONOMIC COMMENTARY, 12 FEBRUARY 2012 (by DIFC)

See: http://www.difc.ae/difc-blogs/weekly-economic-commentary-february-12-2012

Greek troubles and S&P downgrades played havoc last week, causing the rally in Asian markets also to wind down towards end of the week, even as TOPIX and Hong Kong remained near six-month highs. Regional markets were mixed, with Egypt gaining and Saudi closing at a 21-month high yesterday alongside small declines in Qatar and Abu Dhabi exchanges. Among currencies, the euro climbed after the Greek austerity plan received the go-ahead from the Cabinet but dipped on the latest uncertainty about Parliament ratification while the Indian rupee had its worst week since Dec last year. Gold prices continued to decline for a second consecutive week while oil prices spiked to a six-month peak on Thursday given the tensions on Iran.

MARC DOWNGRADES RATING ON SPRINT'S RM510 MILLION BaIDS, AFFIRMS RM365 MILLION BG BONDS; OUTLOOK STABLE

Feb 10, 2012 -
MARC has lowered its rating on Sistem Penyuraian Trafik KL Barat Sdn Bhd's (SPRINT) RM510 million Al Bai Bithaman Ajil Islamic Debt Securities (BaIDS) to A+ID from AA-ID. The rating outlook is stable. Concurrently MARC has affirmed its AA-(bg) rating on SPRINT's RM365 million Bank Guaranteed Serial Fixed Rate Bonds (BG Bonds) with a stable outlook.

The rating and outlook of the BG Bonds reflect MARC's financial institution ratings on two of three banks participating in the consortium of bank guarantors for the BG Bonds, AmInvestment Bank Berhad and RHB Bank Berhad (public information basis), both of which are rated AA-/Stable. The rating on the BG Bonds reflects MARC's continued approach of rating the bonds at the same level as the lowest rated financial institution(s) participating in the consortium of bank guarantors.

The issuer, SPRINT, is the concession holder for the SPRINT highway, a 25.5 km open toll urban highway which serves the west of Kuala Lumpur. SPRINT is wholly-owned by SPRINT Holdings Sdn Bhd which, in turn, is owned by three listed entities, Gamuda Berhad (30%), Lingkaran Trans Kota Holdings Bhd (LITRAK) (50%) and Kumpulan Perangsang Selangor Bhd (20%).

The revision in the rating of the non-guaranteed BaIDS reflects the removal of rating uplift incorporated for shareholder support in the issue rating. The rating on the BaIDS had previously incorporated rating uplift from the stand-alone credit strength of SPRINT on the basis of undertakings by SPRINT Holdings and shareholders of SPRINT Holdings to subscribe to loan stocks and redeemable preference shares respectively, to be issued by SPRINT and SPRINT Holdings, the intent of which was to provide credit support for the BaIDS.

The tangible support provided by SPRINT's shareholders had enabled the toll road concessionaire to maintain fairly robust debt service coverage despite modest cash flow generation prior to the financial year ending March 31, 2010 (FY2010). In the absence of new explicit commitment from SPRINT's shareholders to provide further financial support following the fulfilment of the aforementioned investment obligations undertaken, MARC will not be incorporating the potential for further support into the rating on the BaIDS unless the rating agency is certain of forthcoming financial support.

The rating on the BaIDS incorporates revised traffic projections by independent traffic consultant Halcrow Consultants Sdn Bhd and weaker traffic growth prospects on the SPRINT highway, as well as the compensation payments received from the government in lieu of deferred toll rate hikes since 2008 for the highway's Damansara and Pantai links and 2010, in respect of Kiara Link. The rating also takes into account SPRINT's significantly improved operating cash flow generation in recent financial periods.

The SPRINT highway has seen improved traffic volumes in recent years since the opening of Duta-Ulu Kelang Expressway (DUKE) in 2009. Traffic volume on the Kerinchi Link and Penchala Link grew 9.9% and 21.3% respectively for the 2010 calendar year. Consequently, SPRINT's revenue rose by 29.0% to RM156.5 million for FY2011. However, higher amortisation of SPRINT's highway development expenditure resulted in a larger pre-tax loss of RM49.2 million in FY2011. On a positive note, SPRINT generated cash flow from operations of RM110.5 million in FY2011, up from RM107.8 million for the prior year, and has a cash balance of RM115.0 million as at end-FY2011.

According to the aforementioned May 2011 traffic study which incorporates downward revision of projected traffic along the three links of between 12% to 32% from 2012 through 2035, possible congestion along the Kerinchi Link could limit traffic growth on the highway. The financial impact of the revised forecast will be a reduction of SPRINT's minimum and average projected debt service coverage ratio (DSCR) to 2.13 times and 3.21 times respectively, from 2.24 times and 3.62 times respectively based on the previous traffic forecast. Additionally, should toll hikes not occur as scheduled and if SPRINT were to receive cash compensation payments, half of which is paid in the following financial year, its minimum and average projected DSCR would fall to 1.93 times and 2.87 times respectively. The rating agency notes that SPRINT’s cash flow is more sensitive to delays in the receipt of compensation payments from the government than negative yearly variances of up to 15% from projected traffic volume for the highway’s Kerinchi and Penchala links.

The prompt payment of compensation from the government is fundamental to SPRINT’s maintenance of its liquidity and cash flow metrics at levels commensurate with its current rating, particularly in view of its forthcoming debt obligations of RM131.2 million and RM143.6 million in FY2012 and FY2013 respectively.

The stable outlook assumes that the SPRINT highway will achieve traffic levels in line with the revised traffic forecast and that SPRINT's cash flow generation and liquidity will not detract significantly from anticipated levels.

Contacts:
Sandeep Bhattacharya, +603-2082 2247 / sandeep@marc.com.my;
David Lee, +603-2082 2255 / david@marc.com.my;
Jason Kok, +603-2082 2258 / jason@marc.com.my.

RAM Ratings reaffirms Royal Selangor's rating, maintains negative outlook

Published on 13 February 2012
RAM Ratings has reaffirmed the A3 rating of Royal Selangor International Sdn Bhd’s (Royal Selangor or the Group) RM30 million Redeemable Unsecured Bonds (2001/2014) and maintained the negative outlook on the Group’s long-term rating. Royal Selangor and its subsidiaries are involved in the manufacturing and marketing of pewter, as well as marketing of jewellery products.

The rating is supported by Royal Selangor’s well-established brand, manageable balance sheet and moderate cashflow-protection measures. The ratings are, however, moderated by its susceptibility to cyclical economic change amidst a competitive and fragmented industry, its longer operating cash cycle days, continued losses in Selberan Jewellery Sdn Bhd and its exposure to volatile tin prices.

Royal Selangor’s overall operating performance improved in FYE 30 June 2011 (FY June 2011). The Group’s revenue grew 7.24% on the back of half-year contributions from its new Straits Quay tourist centre and its new flagship store at Pavilion which opened in the second half of the fiscal year as well as increased sales of higher-value items. Meanwhile, the Group’s profit margins also improved, aided by effective tin hedging policy and above-mentioned increased sales of higher-priced products. Despite the better operating performance, funds from operation debt cover (FFODC) slipped to 0.14 times (end-FY June 2010: 0.22 times) as more debt were assumed during the year amid its store expansion and corresponding increase in working capital needs. The higher debt levels lifted Royal Selangor’s gearing ratio to 0.73 times as at FY June 2011 (end-FY June 2010: 0.66 times) but is still within our expectations.

“Looking ahead, Royal Selangor’s gearing ratio is envisaged to stay manageable at below 0.8 times in the next 2 fiscal years, as its capital expenditure plans are estimated to be less hefty than those incurred in FY June 2011. Full-year contribution from the Group’s new outlets opened in 2H FY June 2011 as well as full-year effect of selling price increase implemented in April 2011 are expected to keep its FFODC at around 0.15 times in the near term. That said, the Group’s FFODC may dip below 0.15 times should Royal Selangor’s product demand be affected by the weaker economic environment,” explains Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

Meanwhile, the negative outlook is premised on fresh concerns over the softer economic conditions and the resultant impact on consumer and corporate spending on discretionary pewter giftware. The impact of higher tin price contracted on margins and the lengthening of operating cash cycle on higher working capital needs may also pose downside risk to Royal Selangor’s performance.

The rating may revert to stable if the Group is able to demonstrate resiliency amidst the challenging economic conditions as well as preserve its balance sheet strength and cashflow-protection measures. Conversely, the rating could be downgraded if Royal Selangor's business and financial profiles deteriorate.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my