RAM Ratings upgrades rating of RH Capital’s Class B Sukuk Ijarah to AA1, reaffirms top-tier ratings of other Islamic securities

Published on 09 July 2012

RAM Ratings has upgraded the rating of the Class B Sukuk Ijarah (2005/2016) (“Sukuk Ijarah”) issued by RH Capital Sdn Bhd (“RH Capital” or “the Issuer”) from AA2 to AA1. Concurrently, the respective AAA and P1(s)/AAA(s) ratings of the Class A Sukuk Ijarah and Sukuk Ijarah Commercial Paper/Medium-Term Notes Programme (2005/2012) (“Sukuk Ijarah CP/MTN”) have been reaffirmed. All the long-term ratings have a stable outlook.

The ratings of the Sukuk Ijarah CP/MTN reflect the enhancement provided by the Sukuk Put Option, granted by OCBC Bank (Malaysia) Berhad (“OCBC Malaysia”) to the Sukuk holders. OCBC Malaysia has financial institution ratings of AAA/P1, with a stable outlook. 

RH Capital is a special-purpose vehicle incorporated as the financing conduit for an Islamic sale-and-leaseback transaction, backed by 3 oil-palm plantations and 2 palm-oil mills (collectively known as “the Assets”) located in Sarawak. The lessees, subsidiaries of Tiong Toh Siong Holdings Sdn Bhd (one of the main holding companies of the Rimbunan Hijau Group), had sold their beneficial interests in the Assets to RH Capital. In turn, RH Capital had leased the Assets back to the respective lessees; the financial obligations under the Sukuk Ijarah are met via lease payments from the lessees.

The upgrade reflects the higher collateral value backing the Class B Sukuk Ijarah, following the scheduled deleveraging of the transaction. Consequently, the loan-to-value ratio for the Class B Sukuk Ijarah has eased from 45% to 37%, with a stronger corresponding debt service coverage ratio of 2.20 times (from the previous 1.80 times). On a related note, the stable outlook of the Sukuk Ijarah reflects our view that the lessees will be able to meet their scheduled Ijarah payments and, in turn, the payment obligations under the Sukuk Ijarah.

Meanwhile, RAM Ratings has revised its price assumption on crude palm oil (“CPO”) for the immediate 1-year horizon, pursuant to the revision of our valuation approach for commercial real estate (“CRE”)-backed transactions involving oil-palm plantations. Concurrently, the upward adjustment to the plantations’ sustainable cashflow has been moderated by adjustments to our assumptions on the yields of fresh fruit bunches (“FFB”) and plantation costs to better reflect the expected performance of the estates. Our analysis indicates that the sustainable cashflow will remain unchanged at RM10 million.

Overall, RH Capital’s 3 estates delivered a commendable performance in fiscal 2011. Average FFB yield increased to 13.02 MT/ha (2010: 11.43 MT/ha). Nonetheless, the estates’ FFB yields were below Sarawak’s average of 16.77 MT/ha, due to steeper terrain as well as less-than-ideal infrastructure and connectivity. Meanwhile, the oil-extraction and kernel-extraction rates of the palm-oil mills remained broadly unchanged at 19.7% and 3.8%, respectively. These are underpinned by stringent grading of FFB purchased, resulting in healthy output of palm oil and palm kernels.

All in all, the lessees’ financial performance improved year-on-year in fiscal 2011, premised on higher production and stronger prices of CPO and FFB (RM3,151 per MT and RM613 per MT compared to RM2,415 per MT and RM451 per MT in fiscal 2010). RAM Ratings expects the lessees to continue delivering a healthy financial performance this year, on the back of positive FFB and CPO prices. We note that the lessees have to date been able to promptly and fully meet the payments on their scheduled lease obligations, thus enabling RH Capital to fulfil its commitments. For a detailed explanation on RAM Ratings’ adjusted-valuation approach for oil-palm plantations-backed transactions, please refer to our Criteria Update: CRE-backed Transactions Involving Oil-Palm Plantations, published on 12 April 2012.

Media contact

Yong Keck Phin

(603) 7628 1017

keckphin@ram.com.my