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 .