RAM Ratings reaffirms ratings of Menara ABS’s RM1 billion sukuk; outlook on Tranche A revised to negative

Published on 16 May 2012

RAM Ratings has reaffirmed the respective AAA, AA2, A1, A2 and AAA ratings of Menara ABS Berhad’s Tranche A1, Tranche A2, Tranche A3, Tranche A4 (collectively, “the Tranche A Sukuk”) and Tranche B Sukuk Ijarah. The rating of Tranche B Sukuk carries a stable outlook whilst the outlook on ratings of Tranche A Sukuk has been revised to negative from stable.

Menara ABS is a trust-owned, special-purpose vehicle incorporated solely for this sale-and-leaseback transaction involving 4 properties - Menara TM, Menara Celcom, TM Taman Desa and TM Cyberjaya (collectively, “the Properties”) - previously owned by Telekom Malaysia Berhad (“TM” or “TM Group”). Profit payments on the Tranche A Sukuk are covered by lease payments from TM while the principal redemption will be met via proceeds from either refinancing, repurchase by TM or disposal of the Properties in the open market. Meanwhile, the principal redemption and profit payments on the Tranche B Sukuk are met by the lease payments from TM, whose credit profile therefore underpins this tranche’s rating and outlook.

The reaffirmation of the Tranche A Sukuk’s ratings is premised on the Properties’ adjusted valuation of RM657 million, the resultant cumulative loan-to-value ratios and stressed debt service coverage levels that remain in line with their respective ratings. The ratings also take into account the minimal counterparty risk given TM’s role as the Master Lessee in the 15-year Master Ijarah Agreement with Menara ABS. We note that TM promptly settled its RM65.39 million of lease payment obligations in December 2011.

The revision in outlook on the Tranche A Sukuk to negative reflects our concern over the potential weakening of the Properties’ cashflow-generating ability, due to the longer-than-expected time taken to fill up vacant space at Menara TM and the significant lease-renewal risk for Menara Celcom. In 2011, the Properties’ net income of RM46 million stayed below our sustainable-cashflow assumption of RM58 million as Menara TM had taken longer than expected to regain full occupancy following its space-optimisation exercise (completed in late 2010). Constrained by the weak market conditions for office buildings, it is likely that TM’s net income will take longer than initially assumed to meet our sustainable-cashflow assumption. The transaction also faces material renewal risk posed by Menara Celcom as the tenancy of its primary tenant is expiring by end-2012. We therefore highlight that a reassessment of the Properties’ sustainable value may be necessary if the Properties continues to underperform.

On a related note, the Properties are expected to be revaluated in 1H 2012. RAM Ratings highlights that there could be a material change in the market value of Menara TM’s refurbished auditorium due to its modified layout and features, which may in turn cause us to revise our valuation approach in arriving at its sustainable value. On this score, we will maintain close monitoring over the progress of the revaluation exercise.

Media contact
Tan Han Nee
03-7628 1023
hannee@ram.com.my