Friday, March 30, 2012


Mar 30, 2012 - MARC has removed its BBID rating on Maxtral Industry Berhad’s (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) from MARCWatch Negative and has withdrawn the rating with immediate effect following the full redemption of the outstanding notes as confirmed by the facility agent, OSK Investment Bank Berhad. MARC’s rating coverage on Maxtral is now only limited to its MARC-4ID/BBID rated RM10.0 million outstanding Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/IMTN) programme, which remains on MARCWatch Negative. MARC will continue to monitor the progress of Maxtral’s refinancing of the outstanding notes, which are due for repayment on April 18, 2012. Contacts: Goh Shu Yuan, +603-2082 2269/; Francis Xaviour Joe, +603-2082 2279/

Thursday, March 29, 2012


Mar 28, 2012 - MARC has affirmed its AAAIS rating on TTM Sukuk Berhad’s (TTM SPV) RM600.0 million Sukuk Murabahah with a stable outlook. TTM SPV is a funding vehicle of Trans-Thai Malaysia (Thailand) Ltd (TTMT), a 50:50 joint-venture between Petroliam Nasional Berhad (PETRONAS) and Thailand's PTT Public Company Ltd (PTT). TTM SPV was incorporated to raise funding for the construction of two gas pipelines to transport natural gas from the Joint Development Area (JDA) to Rayong, Thailand ('Project'). The aforementioned pipelines constitute the second phase (Phase II) of the Trans Thailand-Malaysia gas pipeline and separation project. The affirmed rating reflects the project's satisfactory performance and cash flow generation since Phase II became fully operational in June 2010. Project debt service coverage for the six months to June 30, 2011 (1HFY2011) was within base case projections. The reliability of future cash flow, going forward, is supported by the credit strength of sole project offtaker PTT and contractual capacity revenues which expected to be more than adequate to service debt payments. The rating also takes into account the overall sound credit metrics of TTMT in light of the cross-acceleration and cross-default provisions between the sukuk and the syndicated bank loan taken to finance the first phase of the gas pipeline and separation project. In addition, the rating continues to incorporate support uplift based on the project's economic importance and the financial strength of project sponsors, particularly the creditworthiness of PETRONAS. The sukuk rating is not constrained by Thailand's foreign currency rating notwithstanding the fact that TTMT and the sole offtaker are domiciled in Thailand and project revenues are denominated in the USD or THB equivalent. MARC believes that transfer and convertibility risks are adequately mitigated by the perceived strong incentive on the part of national oil company PETRONAS to provide ringgit liquidity in the event foreign exchange restrictions are imposed by the Thai government and affect TTMT's ability to convert THB-denominated payments into USD for onward remittance to TTM SPV. The Phase II pipelines have been operating according to specifications and based on MARC's estimates, TTMT has been supplying 600 mmscfd of natural gas to PTT since June 2010. This represents full utilisation of the capacity subscribed by PTT under its long-term services agreement with TTMT. During 1HFY2011, the project recorded capacity revenue of THB580 million and cash flow from operations (CFO) of THB489 million. The project's net cash flow covered its debt service by 4.3 times, well above the corresponding financial covenant of 1.1 times. The high coverage level also reflects no amortisation of the sukuk principal until 2015. For the full year 2010, the project generated capacity revenue of THB1,114 million and CFO of THB924 million. At company level, TTMT posted a pre-tax profit of THB1,904 million on a revenue of THB4,280 million in FY2010. For the 1HFY2011, it recorded a profit of THB345 million. MARC notes that company-level cash flow protection measures are stronger than that at project level (Phase II), providing additional support for the sukuk rating. TTMT gearing, as measured by the ratio of its debt-to-equity, rose to 1.4 times as at end-June 2011, but remains within its gearing cap of 70:30. Equity injections by project sponsors in prior years which had earlier helped the company maintain covenant compliance underscore the commitment of project sponsors to the gas pipeline and separation project. The stable outlook on the rating reflects MARC's expectation that the project's good operating record, predictable cash flow and the offtaker's very strong creditworthiness will limit the potential for downward movement in the rating. The outlook also reflects the expectation that TTMT's credit quality metrics will remain sound and that project sponsors will continue to demonstrate a long-term commitment to the project. Contacts: David Lee, +603-2082 2255/; Sandeep Bhattacharya, +603-2082 2247/

Retail investors among regulator’s priorities (By IFN)

See: MALAYSIA: Securities Commission Malaysia (SCM) has outlined its plans for 2012, which includes boosting retail participation in Sukuk and conventional bonds by facilitating the offering of corporate bonds to retail investors. The Malaysian regulator is also set to launch a framework for business trust to create a regional funds passport to facilitate cross-border unit trusts investments. A statement released by SCM said: “Retail investors can look forward to an expansion in product range and asset classes to cater to their investment needs. Other initiatives include improving the access of retail investors to fixed income, derivative and regional products. To facilitate retail participation in Sukuk and conventional bonds, SCM and Bursa Malaysia are working together to facilitate the offering of corporate bonds to retail investors.” The regulator also revealed its efforts to protect foreign and local issuers and investors in the private debt securities and Sukuk markets by creating tailor-made protection requirements for investors. It was also revealed that the amount of fund-raising approved by SCM in 2011 totaled to RM118.93 billion (US$38.69 billion) as at the end of 2011, compared to RM77.02 billion (US$25.5 billion) in 2010. Sukuk approvals had also more than doubled to RM78.9 billion (US$25.67 billion) from RM38.3 billion (US$12.46 billion) the year earlier. An increase in demand from global investors in private debt securities had also boosted numbers to RM15.1 billion (US$4.92 billion) at the end of 2011, compared to RM14.3 billion (US$4.65 billion) in the year before. Out of this, RM5.05 billion (US$1.64 billion) was invested in Sukuk.

Wednesday, March 28, 2012

IIFM and ISDA launch Shariah compliant profit rate swap standard (By IFN)


GLOBAL: The International Islamic Financial Market (IIFM) and the International Swaps and Derivatives Association (ISDA) have launched standards for profit rate swaps for Shariah compliant hedging; as the growing global business of Islamic financial institutions point to the need to mitigate foreign currency risks.

The new agreement, known as the Mubadalatul Arbaah (MA) standard, follows the ISDA/IIFM Tahawwut (Hedging) Master Agreement launched in March 2010.

“Islamic financial institutions have largely shown resilience in the current difficult financial environment and some are even going through an expansion phase. However, due to the inter-linkages with the global financial system, the balance sheet of Islamic financial institutions are exposed to fluctuations in foreign currency rates and also cash flow mismatches due to fixed and floating reference rates,” said Khalid Hamad, chairman of the IIFM.

The standards allow for the bilateral exchange of profit streams from fixed rate to floating rate, or vice versa.

While some quarters still disagree on the use of hedging under Shariah, it cannot be denied that Islamic banks need an instrument to protect against foreign currency risks. Banking giants such as Abu Dhabi Islamic Bank (ADIB) and Dubai Islamic Bank reported foreign currency exposure on assets worth AED70.68 billion (US$19.24 billion) and AED85.17 billion (US$23.2 billion) for 2011, respectively.

In its financial statements, ADIB also noted that a 5% increase in the US dollar exchange rate would decrease its net profit by AED116.55 million (US$31.2 million) in 2011, against a decline of AED67.41 million (US$18.35 million) in 2010.

The new standard from IIFM and ISDA will provide product schedules based on two separate structures for transacting MA to mitigate cash flow risks. The documentation was developed under the guidance and approval of the IIFM’s Shariah advisory panel, in coordination with Clifford Chance as external legal counsel, as well as other global market participants.

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Tuesday, March 27, 2012

Texchem fully redeems RM100 million debt facility

Published on 27 March 2012

Texchem Resources Bhd (“Texchem”) fully redeemed its RM100 million Commercial Papers/Medium-Term Notes Programme (2005/2012) on the scheduled maturity date of 23 March 2012. As such, RAM Ratings no longer has any rating obligation on the debt facility, which had previously been rated BBB1/P2, with a negative outlook.

Media contact
Ben Inn
(603) 7628 1024

RAM Ratings lifts Rating Watch, reaffirms Kencana’s AA3 ratings with stable outlook

Published on 23 March 2012

RAM Ratings has reaffirmed the AA3 ratings of Kencana Petroleum Berhad’s (“Kencana”) RM700 million Sukuk Mudharabah Programme (2011/2026) (“Sukuk Mudharabah”) and proposed RM350 million Sukuk Mudharabah (with detachable warrants) (“Sukuk Mudharabah-W”) (collectively known as “the Sukuk”). Concurrently, we have lifted the Rating Watch (with a developing outlook) and reinstated the stable outlook on the long-term ratings.

We highlight that the ratings are based on the premise that the proposed merger between Kencana and SapuraCrest Petroleum Berhad (“SapuraCrest”) will be successfully completed. Pursuant to the completion of the proposed merger, the merged entity, which will be known as SapuraKencana Petroleum Berhad (“SapuraKencana” or “the Group” (formerly known as Integral Key Berhad (“IKB”)), will assume repayment responsibility on the Sukuk Mudharabah. Meanwhile, the proposed Sukuk Mudharabah-W will be aborted in order to comply with certain conditions of the corporate exercise. RAM Ratings will then withdraw the rating on the Sukuk Mudharabah-W.

To recap, the ratings had been placed on Rating Watch in July 2011, following the announcement that IKB (a special-purpose vehicle incorporated to undertake the corporate exercise) had proposed to acquire Kencana’s entire business and undertakings, including its assets and liabilities, for RM5.98 billion in total; the offer would be satisfied by IKB shares and cash. IKB had simultaneously made a similar acquisition offer to SapuraCrest for RM5.87 billion.

Post merger, we expect the Group’s business profile to be substantially stronger than Kencana’s stand-alone position. The merged entity will become the country’s largest provider of oil-field services and rank among the top 10 world players by market capitalisation. We opine that the enlarged asset base and wider range of services provided will augur well for the Group’s prospects on securing additional global contracts. In particular, the Group is expected to clinch more turnkey engineering, procurement, construction, installation, and commissioning projects. “The merged entity will combine Kencana’s strength in fabrication and engineering with SapuraCrest’s formidable presence in the installation of pipelines and facilities,” observes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

In Malaysia, the Group, along with other local providers of oil and gas support services, benefits from the favourable policies implemented by the Government and Petroliam Nasional Berhad, aimed at nurturing local expertise and reducing dependence on foreign players. The ratings also reflect the Group’s recurring income; Sapura-Kencana is expected to derive 20%–30% of its operating profit before depreciation interest and tax from long-term contracts (mainly for the hire of its drilling rigs). We note that the Group’s pro forma outstanding order book was valued at over RM11 billion as at end-January 2012.

On the flipside, the Group’s financial profile would be weaker given its heftier debt load. We anticipate that the merged entity’s debt burden will balloon to about RM6 billion (pre-merger pro forma: RM2.10 billion as at end-October 2011). This figure takes into account the debts assumed to fund its sizeable capital expenditure and some RM2 billion of borrowings to part finance the merger. The Group’s gearing ratio would thus increase to about 0.9 times (pro forma end-October 2011: 0.60 times). Furthermore, its funds from operations debt coverage ratio is envisaged to weaken to around 0.15–0.2 times in FY Jan 2013 and FY Jan 2014, before recovering thereafter. Taking into consideration cash dividends from the Group’s joint ventures (“JV”), SapuraKencana’s FFO debt cover ratios would recover at a faster pace, particularly once it begins receiving contributions from its JV in Brazil.

Despite the anticipated benefits from the merger, we opine that there is considerable complexity in attempting to integrate the businesses of the 2 large corporations. We note that the merged entity will have an executive committee, comprising an equal number of representatives from SapuraCrest and Kencana, which will oversee key strategic matters. RAM Ratings will closely monitor how this arrangement will affect the Group’s decision-making agility and risk appetite in the future. In the meantime, we note that an integration committee and various task forces have been set up to map, implement, and monitor the integration process.

RAM Ratings will publish the Sukuk rating rationale within a week.

Media contact
Low Li May
(603) 7628 1175

UK in talks to sell part of RBS stake to Abu Dhabi (By BBC)


The UK government is in talks to sell a significant stake in the Royal Bank of Scotland (RBS) to Abu Dhabi, the BBC has learned.

The government, which controls 82% of RBS, has for months been negotiating with Abu Dhabi sovereign wealth funds.

It could sell up to a third of its stake to Abu Dhabi, one of the seven states of the United Arab Emirates.

This is likely to to be a loss-making sale, as RBS shares trade at much less than the UK government paid in 2008.

Monday, March 26, 2012

Quarterly update on Malaysian Economy

Quarterly update on Malaysian Economy can be downloaded from

Friday, March 23, 2012


Mar 22, 2012 -

MARC has affirmed its ratings on Bayu Padu Sdn Bhd’s (Bayu Padu) RM500 million Istisna’ Serial Bonds (Istisna' Bond) and RM100 million Murabahah Commercial Papers/Medium Term Notes (MCP/MTN) programme at AA-ID and MARC-1ID/AA-ID respectively with a stable outlook. The rating action affects RM220 million of Istisna' Bonds and RM95 million of MCP notes outstanding under the rated programmes. Bayu Padu is a wholly-owned funding vehicle of SapuraCrest Petroleum Bhd (SapuraCrest).

The affirmed ratings reflect SapuraCrest group’s leadership position in pipeline installation and offshore drilling, the improvement in its consolidated profitability and the earnings visibility provided by the group’s RM10.1 billion in outstanding order book as at November 30, 2011. These strengths are moderated by the group’s exposure to currency volatility, the strong competition in international markets and the execution risks related to its initial venture into marginal oilfield development. The ratings are primarily driven by the consolidated credit profile of SapuraCrest in that the issuer’s repayment capacity is derived from the financial resources of the group.

The ratings are unaffected by the proposed merger of SapuraCrest with Kencana Petroleum Berhad (Kencana) under which the assets and liabilities of both entities will be combined under a listed merged company, SapuraKencana Petroleum Berhad (SapuraKencana). The merger primarily aims to create a broad-based, well-integrated oil and gas services provider with strong delivery capabilities across the value chain, by leveraging the complementary capabilities of both entities. As one of the country's biggest oil and gas (O&G) service provider, the merged entity would be better placed to compete internationally by offering full-fledged engineering, procurement, construction, installation and commissioning (EPCIC) services, especially for more complex marginal and deepwater exploration and development activities.

While MARC believes the merger will likely produce competitive gains as well as cost synergies, a more visible impact on post-merger credit metrics of the combined entity vis-á-vis its pro forma pre–merger financial metrics is likely to be seen only over the medium and long term. MARC is mindful that SapuraKencana’s business risk profile would evolve beyond the immediate post-merger period in which business integration concerns are likely to dominate. Integration risks should be limited on account of management’s expectation of no attrition and/or rationalisation of staff and the modest overlap in the operations of both entities. Separately, MARC expects the group’s post-merger integration strategy of growing its international business to give rise to additional exposure to currency and country risks.

MARC’s initial assessment of the effect of the merger on SapuraCrest’s financial profile indicates that the more immediate impact of the merger would be an increase in the financial risk profile of the merged entity relative to that of SapuraCrest, balanced against the increased scale and breadth of its business, and improved competitive standing. Selected key financial metrics of the combined entity’s pro forma financial statements, which are based on SapuraCrest and Kencana’s latest audited accounts, are as follows: operating profit margin (OPM) of 13.8%, operating profit before interest and tax (OPBIT) interest coverage of 10.6 times (x), cash flow from operations (CFO)-to-total debt of 0.15x and total debt-to-equity (DE) of 0.75x. These compared with SapuraCrest’s equivalent metrics for the same period: OPM of 11.0%, OPBIT interest coverage of 9.2x, CFO-to-total debt of 0.44x and total DE of 0.57x, indicates that the combined entity’s pro forma debt servicing metrics are somewhat weaker while its profitability and OPBIT interest coverage metrics have strengthened slightly. MARC also notes that the merger entails the payment of approximately 15.6% of the total merger consideration in cash to the shareholders of both companies which will be financed through borrowings of approximately RM2.0 billion by SapuraKencana. With additional borrowings of RM310.0 million for the purchase of Clough’s marine construction business, the pro forma gearing of SapuraKencana would increase to 0.81x.

For the nine months ended October 31, 2011 (9MFY2012), SapuraCrest posted a pre-tax profit of RM397.2 million on revenue of RM1,996.0 million. Its operating profit margin almost doubled to 19.1%, mainly due to stronger performance of its IPF division and the turnaround in its marine services division, resulting in SapuraCrest recording a profit of RM26.0 million compared to a loss of RM51.8 million in the previous corresponding period. Cash flow from operations increased to RM250.6 million (9MFY2011: RM207.5 million) and gearing as measured by the group’s debt-to-equity ratio improved to 0.49x. Cash and bank balances as at end-9MFY2012 at RM646.4 million, suggest that Bayu Padu should be in a position to meet its scheduled debt maturities of RM125.0 million due in 2012 while noting that the cash within the group continues to be largely retained at its operating entities.

Should the proposed merger be successfully completed, the current ratings can accommodate somewhat weaker interim cash flow protection measures on the part of the combined entity in light of the perceived longer-term benefits of the merger. However, should the merged entity’s credit metrics be significantly weaker than expected, MARC will revisit the outlook and/or the ratings.

Se Tho Mun Yi, +603-2082 2263/;
Sabesh Parameswaran, +603-2082 2260/;
Francis Xaviour Joe, +603-2082 2279/

Thursday, March 22, 2012

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Japan posts surprise trade surplus in February (By BBC)


Japan posted a surprise trade surplus in February, after a record high deficit the previous month, as external demand picked up.

The surplus stood at 32.9bn yen ($394m; £248m), the Ministry of Finance said. In January the deficit came in at 1.5tn yen.

Japan has had to increase energy imports, as most of its nuclear reactors remain shut.

Analysts said this was not necessarily a sign of a swing to surplus for Japan.
Export push

"The trade data was a positive surprise as falls in exports were smaller than expected," said Taro Saito from NLI Research Institute in Tokyo.

"But it is too early to conclude the trade balance has returned to a surplus trend."

Overseas shipments fell 2.7% in February from the year earlier, the data showed. Most forecasts were for a drop of 6.5%. Imports rose 9.2% from the previous year.

The improving health of the US economy has contributed to increased demand for Japanese goods.

"Exports to the United States are growing and we have seen signs that the US economy has hit a bottom, so this is a positive sign for Japan's exports," said Shuji Tonouchi from Mitsubishi UFJ Morgan Stanley Securities in Tokyo.
Energy worries

Japanese trade has been in deficit for five months, in large part because of surging demand for imported fossil fuels.

After last year's earthquake and tsunami led to the worst nuclear accident in 25 years, the government decided to take most of Japan's nuclear reactors offline.

More than 30% of Japan's electricity supply was generated by nuclear energy.

The rising price of oil globally and a weaker yen have caused the import bill to swell, exacerbating the deficit.

Wednesday, March 21, 2012


Mar 21, 2012 -

MARC has downgraded the long-term ratings to A+ID from AA-ID, and revised the outlook of the ratings to developing from stable and concurrently affirms the short-term ratings at MARC-1ID for the following rated programmes/issuers:

RM300.0 million Murabahah Underwritten Notes Issuance Facility (MUNIF)/Islamic Medium Term Notes (IMTN) Programme of KNM Capital Sdn Bhd (KNM Capital); and

RM400.0 million Islamic Commercial Paper (ICP) Programme/RM1.1 billion Islamic Medium Term Notes (IMTN) Programme of KNM Group Berhad (KNM).
The rating action affects RM190.0 million of outstanding notes issued by only KNM Capital as there has been no issuance by KNM. The downgrade of the long-term rating reflects KNM’s weak results in recent periods and continued challenging market conditions for the process equipment market. The developing outlook that MARC has attached to the ratings recognises the potential for KNM to stabilise and restore its financial position through rationalisation of its capacity and product portfolio as well as the possibility of negative rating action if the gains from rationalisation are insufficient to stabilise and improve KNM’s credit metrics. The affirmation of the short-term ratings is based on its satisfactory liquidity position vis-a-vis ongoing short-term debt obligations.

KNM’s weak results in recent periods reflect increased competition in the lower-to-middle range process equipment segment and reduced demand for process equipment due to economic cyclical factors. In the high-end process equipment segment, KNM also saw modest increase in new contracts secured due to a general slowdown in capital expenditure by oil and gas majors. Delays in financial close for energy renewal projects which KNM had earlier depended upon to turn around its declining profitability significantly impacted its 2011 results and financial profile. From a geographical viewpoint, the group is exposed to potential macro-economic difficulties in Europe, given the rather high revenue contribution from its European business. The group’s European operations generated 68% of revenue for financial year ended December 31, 2011 (FY2011).

The company has alluded to an expected rebound in 2012, which is expected to be driven by the rationalisation of its plant capacity and product portfolio. In response to the challenges posed by increased competitive intensity in the lower-to-middle range product segment, KNM intends to focus on the high-end segment and diversify into new end markets. On a related note, MARC observes that wholly-owned process equipment manufacturer BORSIG GmbH has defended its niche position well and has significant recurring maintenance and spare parts business. MARC believes that the group’s strategic focus on high-end offerings and cost efficiencies should benefit its consolidated gross margins. At the same time, the agency is mindful of the incremental risks posed by KNM’s decision to market its services as an engineering, procurement, construction and commissioning (EPCC) contractor and facility operator for renewable energy projects notwithstanding the potential benefits to be gained in terms of margin enhancement and recurring income generation. Apart from the group’s lack of sufficient track record as an EPCC contractor, the execution and sovereign risks exposure inherent in such projects could weigh on its consolidated business risk profile.

Based on unaudited results, the group posted a pre-tax loss of RM147.5 million (FY2010: pre-tax profit of RM46.5 million) on revenues of RM1,982.3 million. The full-year loss was mainly attributable to provisions for foreseeable losses and credit impairment which collectively totalled RM140.0 million for the quarter ended September 30, 2011 (3QFY2011). MARC’s rating concern is the continuing trend of declining margins compared to the strong historical double-digit margins experienced prior to FY2009. Partially offsetting the pressure on the group’s financial profile is the increase in cash flow from operations (CFO) to RM165.6 million (FY2010: RM53.7 million), presumably due to working capital reductions. Consequently, CFO interest cover increased to 3.3 times (x) (FY2010: 1.1x) while free cash flow reverted to a positive RM90.6 million (FY2010: -RM2.1 million). The group’s liquidity position is strong, backed by cash and bank balances of RM416.4 million (FY2010: RM296.2 million) vis-a-vis the forthcoming notes redemption of RM90.0 million in 2012.

Downward rating pressure would be exerted on the ratings following slower-than-anticipated progress in the group’s financial turnaround and/or a weakening in its business risk profile. While MARC believes that KNM has the potential to restore its financial health to previous levels in the medium term, the meaningful challenges that management will face in achieving this are also acknowledged.

Goh Shu Yuan +603-2082 2268 /;
Francis Xaviour Joe, +603-2082 2279 /

Tuesday, March 20, 2012


Mar 20, 2012 -

MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBID and MARC-4ID/BBID from BBB-ID and MARC-4ID/BBB-ID respectively. The ratings continue to be maintained on MARCWatch Negative. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million notes issued under the MUNIF/MMTN facility.

The rating action reflects the breach by Maxtral in complying with its sinking fund account (SFA) obligations due in January 2012 and March 2012 to meet its BaIDS of RM20.0 million maturing in April 2012. MARC understands that the bondholders have agreed to grant the company indulgence on the SFA obligations until end-March 2012. In our last rating announcement on December 19, 2011, we noted that the company is highly dependent on asset disposal to meet its debt repayment obligations and the agency is concerned on the ability of Maxtral to execute the asset disposals within the constrained timeframe. MARC now notes that the company has secured a term loan facility from a financial institution to refinance the BaIDS and to redeem a portion of the MUNIF by end-March 2012. As for the remaining MUNIF, the company has until April 18, 2012 to repay the amount, failure of which will lead to a default and the ratings lowered to D.

For the financial year ended December 31, 2011 (unaudited), the company posted an increase in pre-tax loss to RM120.9 million (FY2010: -RM11.99 million) mainly due to impairment of goodwill of RM98.4 million. The continued weak market conditions saw revenue declining to RM21.9 million (FY2010: RM61.5 million). Cash flow from operations and cash and bank balances are modest at RM5.1 million (FY2010: RM10.4 million) and RM1.1 million (FY2010: RM2.4 million).

MARC will continue to monitor the progress of the refinancing exercise and settlement of the remaining MUNIF.

Goh Shu Yuan, +603-2082 2269/;
Francis Xaviour Joe, +603-2082 2279/

Monday, March 19, 2012


Mar 16, 2012 -

MARC has affirmed its AAA rating on Woori Bank’s RM1.0 billion Medium Term Notes (MTN) Programme with a stable outlook. The affirmed rating reflects the bank’s strong banking franchise in the Republic of Korea (Korea), good earnings generation capacity, sound funding profile and capitalisation, as well as progress made by the bank in strengthening its risk management framework. The rating also takes into account easing asset quality pressures, although MARC remains cautious that improving credit trends could reverse given the prospect of slowing domestic growth. While the impending privatisation of Woori Bank’s financial holding company, Woori Finance Holdings Co. Ltd. (WFH), creates uncertainty about the future ownership of the bank, MARC believes that systemic support for Woori Bank will remain high on account of its high systemic importance to the Korean banking sector as a leading commercial bank. MARC rates the notes at the same level as Korea, at AAA with a stable outlook, on its national rating scale. MARC’s country ceiling for ringgit denominated bonds and notes issued by an entity that is domiciled in and operates mainly in Korea is ‘AAA’.

Woori Bank is the second largest commercial bank in Korea, with total assets of KRW242.5 trillion as at end-December 2011 (FY2011). Woori Bank is the key banking entity of WFH, a government-controlled entity in which the Korean government, through Korean Deposit Insurance Corporation (KDIC), currently holds a majority equity stake of 56.97%. The bank has a strong domestic presence across the retail, commercial and corporate banking segments. The bank has also been actively growing its geographic footprint and leveraging on funding and lending opportunities abroad.

The bank’s improving trend of credit costs and declining loan delinquencies suggests that asset quality pressures have been easing. As at end-2011, the bank’s non-performing loan (NPL) ratio has improved to 1.7%, declining from a high of 3.3% at end-FY2010. The bank’s NPLs have declined in absolute terms after rising sharply in FY2010 as a result of its exposure to troubled SME and real estate project financing segments. The improving NPL trend was also aided in part by sales of NPLs to third parties and workouts of problem corporate loans. Problem loans classified as precautionary and below were 4.5% of total loans at the end of 4QFY2011 as compared to 5.1% of total loans in the immediate preceding quarter. MARC considers Woori Bank to be fairly well-provisioned against losses in their loan portfolio. The bank has been building up loan loss reserve (LLR) buffers, as evidenced by its increasing LLR coverage of NPLs which rose to 143.7% as at end-December 2011.

The bank’s financial performance has improved and is showing signs of stabilising. The bank posted a pre-tax income of KRW2,659 billion for FY2011, 73% up from KRW1,537 billion based on restated IRS numbers for FY2010. Woori Bank’s net interest margin (NIM) has improved considerably in recent financial years, reversing the earlier downtrend. The improvement in NIM reflects an increase in the general level of interest rates on corporate and consumer loans, in line with the upward revision of Bank of Korea’s (BOK) key policy interest rate as well as a decline in the bank’s average cost of funds. A significant part of the improvement in Woori Bank’s earnings performance stems from lower credit costs in respect of its loan portfolio which decreased by KRW596 billion from the previous year. The decline in impairment on credit losses was attributable to an improvement in asset quality, and, to a lesser extent, the application of the International Financial Reporting Standards as adopted by Korea and the Financial Supervisory Service’s (FSS) guideline on regulatory reserves for credit losses.

Woori Bank’s improved profitability and easing asset quality pressures are expected to alleviate pressure on the bank’s capitalisation. The bank’s capital adequacy ratios have declined from end-FY2010 levels but remain sound at 13.8% and 10.7% for its total and tier-1 capital adequacy ratios respectively as at December 31, 2011. The bank’s hybrid capital component of its Tier 1 capital dropped to KRW1,682 billion from KRW2,394 billion a year earlier as a result of the redemption of hybrid securities that were issued to the Korean government in March 2009 to assist the bank’s recapitalisation in the wake of the global financial crisis. MARC views positively the bank’s efforts to build a buffer of loan loss reserves during recent periods, which will place the bank in a stronger position to weather a challenging credit cycle.

MARC views the bank’s deposit base to be sufficiently granular and stable and notes its recent success in increasing its proportion of low-cost demand and savings deposits. The bank’s loan-to-deposit ratio shows an improving trend, declining to 94.8% excluding certificates of deposit as at end-2011 from 97.0% a year earlier, and should position the bank to maintain ongoing compliance with regulatory liquidity requirements.

The stable outlook reflects MARC’s belief that Woori Bank’s credit strengths and recurring profitability should allow it to withstand considerable economic headwinds.

Milly Leong, +603-2082 2288/;
Sakinah Ali, +603-2082 2272/

Friday, March 16, 2012

Asia’s sovereigns continue to lead Sukuk sales (By IFN)


GLOBAL: Asia’s sovereigns have issued a slew of Sukuk in March; in a sure sign that government and government-related debt will continue to dominate the market this year.

Among sovereign and quasi-sovereign Sukuk that have been issued this year include a BN$100 million (US$79.29 million) short-term Sukuk Ijarah issuance from the Autoriti Monetari Brunei Darussalam, the monetary authority, on the 8th March. While remaining under the radar, this is the Brunei’s government 69th issuance of short-term Sukuk; amounting to BN$3.75 billion (US$2.97 billion)-worth of short-term Sukuk since April 2006.

Meanwhile, Indonesia’s government raised IDR1.66 trillion (US$180.94 million) in a Sukuk auction on the 13th March, while its retail Sukuk auction is set to close today; and Malaysia’s Khazanah Nasional issued a US$358 million exchangeable Sukuk.

The activity in the sovereign Sukuk market is also in tandem with the preference seen for emerging market assets that has arisen as a result of the prevailing Eurozone crisis.

In a report on 2011 sovereign transitions and defaults, Fitch Ratings noted that: “Economic and financial disruptions emanating from the Eurozone crisis and Middle East political unrest rendered negative effects on a number of sovereign ratings in 2011. By contrast, Asia Pacific, Latin America and a handful of emerging European credits provided most of the positive sovereign rating moves; with improved growth and economic metrics a common theme.”

It also said that the accumulation of international reserves, greater monetary and exchange rate flexibility, moderate fiscal deficits, strong growth and greater resilience to shocks underpinned the broadly positive credit and ratings outlook for emerging markets last year. “With the exception of the Middle East and Africa, where the political and economic fallout from the Arab Spring took their toll on sovereign creditworthiness, emerging markets quality advanced strongly in 2011,” it added.

Fitch also commented that ratings upgrades for emerging Asia’s sovereigns also picked up momentum last year; with Indonesia as among countries which saw its credit rating move to investment grade from speculative.

RAM Ratings reaffirms AA1/P1 ratings of YTL Corp’s debt issues

Published on 15 March 2012
RAM Ratings has reaffirmed the ratings of YTL Corporation Berhad’s (YTL Corp or the Group) RM500 million Medium-Term Notes Programme (2004/2019) and RM500 million Commercial Papers Programme (2005/2012) at AA1 and P1, respectively; the long-term rating has a stable outlook. YTL Corp is a conglomerate that has interests in power generation and transmission, water and sewerage, cement manufacturing and trading, property investment and development, construction, hotels, telecommunications and information technology.

The ratings are supported by YTL Corp’s strong business profile with multiple businesses and a diversified earnings base. The Group’s key subsidiaries in various industries are viewed to have strong, entrenched positions in their respective sectors. While the Group is exposed to cyclical industries such as cement manufacturing, property development and construction, this is mitigated by the steady and predictable cashflow from its utilities division.

Armed with ample cash and manageable short-term debt obligations, YTL Corp’s liquidity position is deemed strong. RAM Ratings maintains a favourable view of YTL Corp’s financial flexibility, on the basis of its ability to tap its subsidiaries for additional dividends.
Whilst the Group’s credit fundamentals are moderated by its heavy debt load, we note that most (75%) of its debts are concession-related, ring-fenced and non-resource to YTL Corp. The Group’s debt burden of RM28.25 billion as at end-June 2011 translates into a gearing ratio of 2.25 times; its net gearing ratio stood at 1.28 times, supported by the Group’s enlarged cash pile. At company level, YTL Corp’s respective gearing and net gearing ratios (on an adjusted basis) had eased to 0.66 times and 0.38 times as at end-June 2011 (end-June 2010: 1.00 time and 0.74 times), following the cancellation of corporate guarantees extended for its acquisitions in Singapore, after the completion of its property division’s restructuring.

Meanwhile, YTL Corp remains acquisitive in its quest to further expand and diversify its earning base. While this could mean potential upside for its earnings, we are cautious about the additional operations, political, regulatory and currency risks that may be introduced, not to mention the added strain on its financial position, as its future investments could well entail debt-funding (wholly or partly). Acquisitions by its subsidiaries that necessitate corporate guarantees from YTL Corp may further strain its financials. In this context, we expect that YTL Corp will consider the impact of such acquisitions on the Group’s balance sheet and ensure that any such debt will be adequately supported by the returns generated.

Media contact
Chew Wei Li
(603) 7628 1025

Thursday, March 15, 2012

Khazanah Nasional closes another Islamic deal in Hong Kong (By IFN)


GLOBAL: Malaysian sovereign wealth fund (SWF), Khazanah Nasional, has once again tapped the Islamic market for a China-related deal; issuing a US$358 million Sukuk convertible into shares of Hong Kong-listed Parkson Retail Group.

Khazanah owns around 7.8% of Parkson. Its Sukuk is exchangeable into its entire holdings in Parkson, equivalent to 220 million shares.

Speaking to Islamic Finance news, a banker involved in the transaction commented that: “The deal was smoothly executed and successfully priced at the tightest end of the guidance. It received overwhelming response from the investors; marking yet another successful foray by Khazanah into the exchangeable Sukuk market.”

Pricing for the papers, which mature in seven years, was fixed at 0% at its launch. However, the yield was offered in a range between -0.25%-0%; with a conversion premium of 25-30%.

The deal was arranged by CIMB, Deutsche Bank and JP Morgan; and saw over US$1.5 billion-worth of demand from over 100 investors. The investors reportedly include convertible bond hedge funds; while also comprising investors from Asia, who took up around half of the offering, Europe (30%) and the Middle East (20%).

The Sukuk is backed by Khazanah’s holdings in Parkson and follows a similar transaction in 2008, when the SWF raised US$550 million through a five-year Sukuk convertible into 44 million Parkson shares, equivalent to a 7.9% stake.

The equity backing the current Sukuk deal is also underlying the 2008 Sukuk; of which 55% remains outstanding.

RAM Ratings reaffirms YTL Power Generation's AA1 debt rating

Published on 14 March 2012

RAM Ratings has reaffirmed the AA1 rating of YTL Power Generation Sdn Bhd’s (“YTLPG” or “the Company”) RM1.3 billion Medium-Term Notes Programme (2003/2014) (“MTN Programme”), with a stable outlook. YTLPG, a wh
olly owned subsidiary of YTL Power International Berhad (“YTLPI”), is an independent power producer (“IPP”) that owns and operates 2 combined-cycle, gas-turbine power plants - in Paka, Terengganu (808 MW), and Pasir Gudang, Johor (404 MW).

YTLPG’s Power Purchase Agreement (“PPA”) with Tenaga Nasional Berhad guarantees the Company an income of at least RM1.1 billion, provided it delivers the minimum quantity of 7,450 GWh of electricity per year. However, we note that the amount of electricity generated in FYE 30 June 2011 (“FY June 2011”) was marginally lower than the take-or-pay minimum quantity due to curtailed gas supply. In this regard, the PPA allows YTLPG to reschedule its electricity generation by 9 months following any gas-supply interruption; the dip in sales had been compensated for by end-December 2011. Going forward, we envisage YTLPG to maintain its strong operational performance, premised on its commendable track record.

Over the next 3 years, YTLPG is projected to generate RM400 million of annual pre-financing cashflow against RM320 million of yearly debt obligations under its MTN Programme. Notably, YTLPG’s financing covenants do not prohibit additional borrowing, thus allowing it to procure and draw down RM600 million via a revolving credit (“RC”) facility in FY June 2011. Factoring in the repayment on the RC facility and given the approaching expiry of the PPA in September 2015, YTLPG’s external debt obligations will exceed its annual pre-financing cashflow in both fiscal 2013 and 2014; the Company will draw on its cash reserve to meet its due. Nevertheless, we expect parent YTLPI to step in with financial support to service YTLPG’s debt obligations, if required; we have observed similar trends in the past given that the Company is one of YTLPI’s key subsidiaries.

Looking forward, we can derive comfort from YTLPI’s healthy credit position, underscored by its robust business profile and ample liquidity. However, site concentration risk remains a key risk to YTLPG despite of it operating in 2 different locations. Similar to other IPP, YTLPG remains exposed to regulatory risks.

Media contact
Davinder Kaur Gill
(603) 7628 1118

Rubberex fully redeems bonds before maturity

Published on 14 March 2012

Rubberex Corporation (M) Berhad (“Rubberex”) has made an early redemption on the RM1 million of outstanding notes under its RM50 million Medium-Term Notes Programme (2006/2013). The debt facility has consequently been cancelled. Following this, RAM Ratings no longer has any rating obligation on the facility, which had been previously rated A2, with a negative outlook.

Media contact
Amy Lo
(603) 7628 1078

Friday, March 9, 2012


Mar 6, 2012 -
MARC has affirmed the ratings of Dura Palms Sdn Bhd’s (Dura Palms) RM100 million Series A, RM90 million Series B and RM10 million Series C Sukuk Ijarah at AAAIS, AAIS and AIS respectively. The ratings carry a stable outlook. The rating action affects RM134.0 million of total outstanding sukuk comprising RM64.0 million Series A sukuk, RM60.0 million Series B sukuk and RM10.0 million Series C sukuk.

Dura Palms is a special purpose company and wholly-owned subsidiary of Teck Guan Holdings Sdn Bhd (Teck Guan) created for the purpose of issuing the Sukuk Ijarah to facilitate the sale and leaseback of 6,861 hectares of oil palm plantation estates (the securitised estates) owned by Teck Guan’s subsidiaries, Andum Sdn Bhd, Happy Valley Plantation Sdn Bhd and Teck Guan Plantations Sdn Bhd (the sellers/lessees).

The affirmed ratings reflect the strong performance of the securitised estates, satisfactory loan-to-value (LTV) and debt-service coverage ratios (DSCR) consistent with the respective ratings and credit protection features within the transaction’s structure. Under the terms of the transaction, Dura Palms possesses a put option, exercisable upon expected maturity of the Sukuk Ijarah, to sell the securitised estates to the sellers/lessees and use the proceeds thereof to redeem the outstanding Sukuk Ijarah. Should this fail, the assets can be sold to third parties to repay the remaining Sukuk Ijarah before the legal maturity date. In addition, the Sukuk Ijarah benefits from an irrevocable undertaking by Teck Guan to provide liquidity support in the event that Dura Palms or the sellers/lessees are unable to fulfil their obligations with respect to the Sukuk Ijarah.
The securitised estates posted a total fresh fruit bunches (FFB) yield of 139,493 MT for its financial year ended January 31, 2011 (FY2011) compared to 162,007 MT in FY2009.

Production over the reviewed period was 13.9% lower than the previous period due to a combination of replanting of mature palm trees, unfavourable weather and biological tree stress. Nonetheless, the estates continued to show average yield per hectare of planted area above industry benchmarks at 22.4 MT/ha (FY2010: 25.0 MT/ha). Subsequently, in the nine-month period ended October 31, 2011 (9MFY2012), the securitised estates’ average yields rose to 18.67 (FY2011: 15.1 MT/ha), which were also well above the industry average yield of 15.28 MT/ha.

Meanwhile, the net operating income (NOI) results of the securitised estates have stayed above MARC’s assumed stabilised level (RM28.3 million), based on above-average yield performance and relatively strong average FFB prices (RM550/MT in both FY2011 and FY2010). For the nine-month period ended October 31 2011 (9MFY2012) and FY2011, the estates recorded NOI figures of RM54.4 million and RM35.1 million respectively. Scheduled amortisation has caused loan-to-value (LTV) ratios to improve to 24.8% and 48.1% for the Series A and B sukuk respectively. MARC has maintained its discounted cash flow valuation of the securitised estates unchanged at RM258.0 million, taking a forward-looking view of the likely range of collateral performance over the intermediate term.

The stable outlook for the Sukuk Ijarah reflects MARC’s opinion that the securitised estates will continue to perform within expectations. MARC believes that refinancing risk at the final maturity of the Sukuk Ijarah is largely mitigated by the value and saleability of the securitised estates which will support redemption of the Sukuk Ijarah by way of disposal of the securitised estates.

Sandeep Bhattacharya, +603-2082 2247/;
Ruben Khoo, +603-2082 2265/

Wednesday, March 7, 2012

Bahrain bouncing back? (By IFN)


BAHRAIN: Despite talk of the kingdom losing its sheen as a financial hub amid its political instability, new data shows that a growing number of financial institutions registered in Bahrain up to the end of January, bringing the amount registered to 415 from 403 a year earlier.

While banks such as Crédit Agricole CIB and BNP Paribas grabbed headlines last year on news that some of its operations in Bahrain will move to Dubai, it has since emerged that those decisions were not based on the political situation in the kingdom. Instead, Bahrain’s financial sector has appeared to remain resilient, charting a 1.7% growth during the first half of last year.

According to data from the Bahrain Economic Development Board (EDB), among new financial firms that registered in the kingdom in 2011 include India’s Canara Bank, AMP Capital Investors from Australia and Deloitte Corporate Finance.

“That these businesses are choosing Bahrain as their base for accessing the Gulf economies and the wider Middle East is testament to the strength of the local Bahrain workforce, the quality of the Central Bank of Bahrain’s regulation and the access we provide to the strong-growing Gulf market,” said Mohammed Essa Al-Khalifa, the chief executive of the EDB.

Furthermore, while a need for consolidation in the financial industry remains and despite the dead-end in merger negotiations between Bahrain Islamic Bank and Al Salam Bank-Bahrain; local banks appear positive of bright prospects ahead. These include local giant Al Baraka Banking Group, which has projected a 15% growth in group profits this year and has embarked on an aggressive expansion plan covering Algeria, Egypt, Indonesia and Turkey.

Bankers are also reportedly looking toward a recovery in local infrastructure spending, which has been estimated at between US$15-20 billion in the next two-three years, in addition to the kingdom’s proximity to Saudi Arabia, to boost business.

Nonetheless, it cannot be ignored that concerns remain, with market players noting local bank liquidity levels; with a number of maturities due this year, the closure of retail shops, lower office occupancy levels and rising unemployment as among limitations that still prevail.

Monday, March 5, 2012

RAM Ratings puts Cerah Sama's Islamic securities on Rating Watch with developing outlook

Published on 02 March 2012
RAM Ratings has placed the AA3 rating of Cerah Sama Sdn Bhd’s (“Cerah Sama”) RM600 million Sukuk programme on Rating Watch, with a developing outlook. Cerah Sama is the investment-holding company that wholly owns Grand Saga Sdn Bhd (“Grand Saga”), the toll operator and concessionaire for the Cheras-Kajang Highway (“the Highway”).

This rating action follows the Government’s announcement that toll collection will be abolished at 2 points (out of 4) along the Highway. Effective 2 March 2012, toll users will be exempted from paying the RM1.00 tariff at the Batu 9 toll plaza when heading towards Kuala Lumpur, and the RM0.90 tariff at the Batu 11 toll plaza when heading towards Kajang (from Kuala Lumpur). The repayment of Cerah Sama’s Sukuk programme is anchored by toll revenue from the Cheras-Kajang Highway.

We expect the Rating Watch to be resolved once the Highway’s compensation terms are made known to us, as any changes to the concession terms will need to be reassessed for credit implications. We note that Grand Saga had been adequately compensated by the Government for previous amendments of its concession agreement.

RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt 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.

Issues 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 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.

Media contact
Davinder Kaur Gill
(603) 7628 1118


Mar 2, 2012 -

MARC has affirmed its ratings of A+IS and A-IS on Senai-Desaru Expressway Berhad's (SDEB) RM1.89 billion nominal value Senior Sukuk Ijarah Medium Term Notes (Senior Sukuk) Programme and RM3.69 billion nominal value Junior Sukuk Ijarah Medium Term Notes (Junior Sukuk) Programme. SDEB, a 70:30 joint-venture between Rancak Bistari Sdn Bhd and Johor state-owned YPJ Holdings Sdn Bhd, is the concessionaire and highway operator of the Senai-Pasir Gudang-Desaru Expressway (E22). The rating outlook has been revised to negative from stable to reflect pressure on SDEB’s financial profile arising from the significant under-performance of traffic on E22 relative to the traffic consultant’s projections. The actual traffic generally tracks MARC’s worst-case scenario estimates. While SDEB’s satisfactory liquidity position provides a degree of certainty that it will be able to meet its short-term obligations, MARC opines that meaningful and sustained improvement in traffic volumes during the current ramp-up phase will be needed to offset the downward rating pressure. Extended underperformance of traffic on E22 will result in finance service coverage levels and liquidity that would no longer be consistent with current ratings.

Actual traffic on E22 was only 48% of projections in the first 11 months of 2011. The lower traffic volume was partly due to the late opening of the last stretch of the highway from Pasir Gudang to Desaru. The E22’s first phase which links Senai to Pasir Gudang (Package 1 and Package 2) had commenced tolling on October 10, 2009. The expressway’s Package 3, which links Pasir Gudang to Desaru, was opened to the public on June 10, 2011 after a four-month delay and commenced tolling on July 10, 2011. Average daily traffic continues to be 35% below projections following the full opening of the highway. Traffic volume on the E22 has been heavily affected by the availability of alternative toll-free routes and high toll-differential between the E22 and the North-South Expressway.

Reflecting the underperformance of traffic on the E22, SDEB’s revenue in the financial year ending June 30, 2011 (FY2011) was 54.6% below projections at RM13.2 million (FY2010: RM7.1 million). Operating profit for FY2011 had declined to RM2.6 million compared to FY2010’s operating profit of RM16.4 million. The prior fiscal year results had benefited from RM25.3 million of compensation arising from construction delays. Despite the lower-than-expected revenue figures, SDEB’s liquidity position appears to be sufficient to meet its operational requirements and debt obligations in the next 18 months, with cash flow from operations (CFO) and cash and bank balances of RM0.55 million and RM46.7 million respectively (FY2010: RM17.0 million; RM141.4 million) vis-à-vis projected figures of RM0.76 million and RM52.8 million respectively.

MARC will continue to monitor traffic volume of the E22 closely and SDEB’s credit metrics to the extent that downside risks would be primarily driven by extended underperformance of traffic and deteriorating liquidity. Conversely, the rating may be revised to stable if deviations from base case traffic and cash flow projections narrow to a meaningful extent.

Jason Kok, +603-2082 2258/;
David Lee, +603-2082 2255/;
Sandeep Bhattacharya, +603-2082 2247/


Mar 2, 2012 -
MARC has downgraded the State Bank of India’s (SBI) Senior Unsecured Bonds of RM500 million to AA from AA+ following the incorporation of transfer and convertibility (T&C) risk into the ratings of ringgit-denominated debt issuances by foreign issuers. The outlook is stable.
Under the refined methodology, MARC’s approach going forward will be to cap the ratings of non-sovereign foreign issuances at the relevant foreign currency ceiling unless there is compelling evidence to suggest that the issuer can be assured of unimpeded access to foreign currency needed for debt service under a scenario in which the sovereign is facing a foreign currency-generated liquidity crisis. MARC’s downgrade of SBI’s bond rating does not reflect deterioration in the rating agency’s sovereign credit rating on the Government of India (GOI). The rating agency had not previously incorporated T&C risk into SBI’s debt rating.

The downgrade aligns SBI’s debt rating to MARC’s national scale rating on the Indian sovereign which also operates as the ‘rating floor’ for systemically important Indian banks. MARC considers that SBI is materially exposed to GOI’s sovereign credit risk due to its significant exposure to government securities and the domestic operating environment. SBI’s credit strengths continue to include its dominant market position as India’s largest commercial bank, its solid access to customer funding and its high likelihood of receiving government support in the event of need. The recent weakening of SBI’s asset quality metrics and capitalization is partly offset by the bank’s track record of profitable operating performance, and expectation of improving capital strength in the near-term.
The stable outlook on the rating is primarily driven by MARC’s stable rating outlook on the ‘AA’ foreign currency country ceiling for ringgit-denominated debt issued by Indian issuers. In light of the interplay between MARC’s bond rating on SBI and the rating agency’s foreign currency country ceiling on India, the issue rating of the majority state-owned financial institution and corresponding rating outlook are expected to be primarily driven by MARC’s rating on the Indian sovereign. A change in the foreign currency country ceiling on India will necessitate a review of SBI’s bond rating to the extent that a downgrade will trigger a lowering of SBI’s bond rating while an upgrade could support a higher rating on SBI.

SBI operates with an extensive network of 13,772 domestic and 174 international offices/branches spread across 33 countries as at December 31, 2011. As India’s oldest and largest bank, it possesses an entrenched and stable franchise with a market share of between 16.2% and 16.5% in domestic deposits and loans as at December 31, 2011. Over the past few years, SBI has been steadily expanding its international operations; foreign operations contributed 5.7% and 11.6% of the bank’s revenue and assets respectively for the financial year ended March 31, 2011 (FY2011). SBI’s expanding international operations offer increased asset diversification.

SBI’s liquidity remains healthy; the bank continues to benefit from a stable deposit base and a moderate loan to deposit ratio of 84.6% as of end-December 2011. In FY2011, SBI’s net loans expanded by 19.8% (FY2010: 16.5%) while its deposits increased 16.1% (FY2010: 8.4%). The bank’s current and savings accounts (CASA) to deposits ratio remained favourable at 47.5% as at end-December 2011. SBI’s strong CASA ratio continues to be viewed as a positive rating factor, particularly in a rising interest rate environment as witnessed by the Indian banking system in the 2011 calendar year. The bank’s reported interest spread widened during the first half of FY2012. SBI’s holdings of liquid assets were 26.3% of total assets as at end-December 2011 (FY2011: 28.9%).

SBI’s return on assets (ROA) has exhibited a declining trend since FY2010; after-tax profit growth has been affected by higher credit costs and staff cost increases. Provisions for non-performing assets (NPAs) net of write-backs amounted to Rs87.9 billion or 34.7% of pre-provision operating profit in FY2011, and remained elevated at Rs87.1 billion or 39.6% of pre-provision operating profit for the first nine months of FY2012. The higher loan loss provisioning was necessitated by the upward trend in gross NPAs as well as tightened regulatory loan loss provisioning requirements. Staff costs, meanwhile, rose 13.5% in FY2011 as a result of higher gratuity and pension provisioning in addition to increased staff strength. In 9MFY2012 (April 2011 to December 2011), provisions for superannuation benefits moderated to Rs24.2 billion from Rs31.3 billion in 9MFY2011. SBI’s resilient core profitability and growth in its net interest income has allowed the bank to absorb the high provisioning costs and write-offs in recent periods relatively well. However, SBI will require capital infusion in the near term to maintain the growth momentum in its net interest income.

SBI has experienced asset quality deterioration, as indicated by rising gross and net NPA ratios. SBI’s reported gross non-performing loan (NPL) ratio rose to 4.61% as at end-December 2011 from 3.17% a year ago. SBI’s net NPA ratio stood higher at 2.22% as at end-December 2011 compared to 1.61% a year ago. Fresh slippages in the three months to December 31, 2011 (Q3FY2012) remained high at Rs81.61 billion (Q2FY2012: Rs80.16 billion), with the bulk coming from large corporate and mid-corporate accounts linked to sectors such as iron and steel, metal and mining, textiles, real estate and agriculture. Slippages from its restructured loan book stood at Rs96.83 billion. MARC notes that SBI was earlier given a one-year extension by the Reserve Bank of India (RBI) to September 2011 to achieve a provision coverage ratio (PCR) of 70%. Since then RBI has relaxed the requirement; SBI’s PCR was 67.25% as at end-June 2011 against the required 70%, but has since dropped to 62.52% as at end-December 2011.

SBI’s Tier-1 capital adequacy ratio (CAR) and total CAR of 7.59% (FY2010: 9.45%) and 11.60% (FY2010: 13.39%) respectively as at end-December 2011 are currently weak for its rating level, largely as a result of the Rs79.27 billion of pension liability provisions charged to its capital reserves in FY2011. MARC takes comfort from the fact that the GOI approved an Rs79 billion capital infusion into SBI on the January 31, 2012. The capital infusion, which is expected to take place during the current fiscal year, will take the form of a preferential allotment of shares to the GOI and would raise Tier 1 capital to about 8% and the government’s shareholding in SBI to around 65%.

Lim Mei Ching, +603-2082 2267/;
Milly Leong, +603-2082 2275/;
Sandeep Bhattacharya, +603-2082 2247/

Friday, March 2, 2012

RAM Ratings downgrades Silver Bird’s ratings to C3/NP, with negative Rating Watch

Published on 01 March 2012

RAM Ratings has downgraded the respective long- and short-term ratings of Silver Bird Group Berhad’s (“SBGB” or “the Group”) RM30 million Commercial Papers/Medium-Term Notes Programme (2005/2012) (“CP/MTN”), from A2 (negative outlook) and P2 to C3 and NP. We have concurrently placed the Group on Rating Watch, with a negative outlook.

The steep downgrade is premised on the heightened likelihood of default on the Group’s CP/MTN following a series of unfavourable developments announced on 29 February 2012. These include the failure of its wholly owned subsidiaries to repay their banking facilities amounting to RM5.37 million, a disclaimer of opinion expressed by the auditors on the Group’s audited accounts for FYE 31 October 2011 (“FY Oct 2011”), and the suspension from work of 3 key personnel (the group managing director, the executive director and a senior member of its management team).

Based on the terms of the CP/MTN and as stated in the trust deed, the default on the Group’s banking facilities constitutes a cross-default on the CP/MTN if the noteholders wish to exercise their rights. Meanwhile, the suspension from work of the 3 key personnel is to facilitate an internal inquiry into allegations of, among others, irregularities in the Group’s accounts. SBGB’s board has initiated a forensic review of its accounts, to be completed within 3 months. The Group is also expected to announce its plan on the regularisation of the abovementioned selective defaults.

Under the circumstances, RAM Ratings opines that SBGB’s repayment capacity on its RM15 million of outstanding CP/MTN (due on 15 April 2012) is now highly questionable. We note that certain numbers in the Group’s just-released audited FY Oct 2011 accounts vary substantially from those stated in its quarterly results announced on 30 December 2011. In particular, SBGB’s cash balances have been restated at only RM3.56 million, in contrast to the earlier RM35.84 million. Even if its repayment aptitude were to remain intact, the Group may opt to suspend payment of its financial obligations until the findings of the forensic review are revealed (i.e. as in the case of its subsidiaries’ RM5.37 million of banking facilities), which is likely to only take place after the maturity of the CP/MTN.

The negative outlook on SBGB’s previous ratings had reflected our concerns over its ability to expand its market share in the premium-bread market and preserve its already-thin margins amid rising costs. Moreover, the Group’s recent venture into the manufacture of dairy products exposes it to new risks.

The Rating Watch may be resolved following the completion of SBGB’s forensic review and regularisation plan, provided these are completed before 15 April 2012. Alternatively, the ratings will be downgraded to D should the Group fail to redeem the outstanding CP/MTN upon maturity.

RAM Ratings' Rating Watch highlights a possible change in an issuer's debt rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rated debt 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.

Issues 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 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.

Media contact
Low Pui San
(603) 7628 1051

Thursday, March 1, 2012

Sukuk in the pipeline (By IFN)


TUNISIA: The Tunisian government is looking to issue the country’s first sovereign Sukuk this year to finance the budget deficit incurred during last year’s uprising. Adnan Ahmed Yousif, the CEO of Al Baraka Banking Group, revealed that the government is currently in talks with banks with regards to a potential issuance. “They are very serious about it,” he added. Al Baraka Bank is also currently consulting the Tunisian government on Islamic finance, although it was not revealed if the bank is also providing consultation on the Sukuk.

It was revealed just yesterday that the Tunisian government is looking to become an Islamic finance hub in Africa, and is set to establish a legal framework to regulate the country’s Islamic finance industry. Hamadi Jebali, the interim prime minister revealed that the country would need US$35 billion to US$45 billion to finance its development projects, and is looking to the IDB for support. Ahmed Mohamed Ali, the president of the IDB, also acknowledged the potential for infrastructure and development projects in the country, and to see the Tunisian private sector play a more significant role in the implementation of the bank's projects in Tunisia and Africa. He also added: “The French Development Agency had recently suggested to the IDB drawing up a microfinance program in Tunisia.”

Libya and Egypt are also ramping up their Islamic finance efforts to fund budget deficits incurred during the uprisings and to finance re-building and infrastructure projects. Libya has also recently revealed its aspirations to create an Islamic finance framework to regulate the country’s fledgling industry.
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