RAM Ratings reaffirms ratings of Sunway’s debt issue

Published on 12 December 2012

RAM Ratings has reaffirmed the following ratings for Sunway Berhad’s (“Sunway” or “the Group”) RM500 million Commercial Papers/Medium-Term Notes Programme (“CP/MTN”):

Type	Long-term rating	Short-term rating	Rating outlook
RM500 million CP/MTN, of which: i)   Tranche 1 – Up to RM100 million ii)  Tranche 2 – Up to RM100 million iii) RM300 million is unguaranteed	AAA(bg) AA2(bg) A2	P1 P1 P1	Stable Stable Stable

The enhanced ratings of Tranches 1 and 2 reflect unconditional and irrevocable bank guarantees (“BGs”) extended by OCBC Bank (Malaysia) Berhad and RHB Bank Berhad, respectively. The enhanced ratings of Tranches 1 and 2 will reflect the guarantors’ ratings until 15 November 2015 (the maturity date of the BGs). Thereafter, the ratings of the notes that will be reissued will reflect Sunway’s corporate credit ratings (“CCRs”). Given that Sunway’s short-term CCR is the same as the guarantors’, the short-term ratings of Tranches 1 and 2 will be based on the Group’s CCR, in accordance with RAM Ratings’ criteria for the rating of guaranteed issues. The unguaranteed portion of the CP/MTN carries the CCRs of Sunway.

“Sunway’s A2/P1 ratings reflect its solid business position, underpinned by its large-scale and vertically-integrated business model,” elaborates Thong Mun Wai, RAM Ratings’ Head of Real Estate & Construction Ratings. The Group’s profile is further supported by its strong branding and established standing in the property and construction sectors. Sunway’s unbilled property sales stood at a robust RM2.41 billion as at end-September 2012, while the successful replenishment of some RM1.7 billion of jobs in 2012 had substantially boosted its outstanding construction order book to a high of RM3.18 billion. These will provide revenue and earnings support over the next 2-3 years. Going forward, the Group has access to large parcels of land which will sustain it over the medium to long term. Spanning about 3,600 acres (as at 5 December 2012), these tracts of lands are located in fairly prime suburban areas in the Klang Valley, Penang, Johor, China and Singapore. In addition, Sunway enjoys a stable stream of dividend income and management fees through its associate stake in Sunway Real Estate Investment Trust, which will continue to provide it with diversity and stability of earnings and cashflow.

That said, Sunway’s credit profile is constrained by its hefty debt load and weak debt-protection measures. As at end-September 2012, the Group carried some RM2.60 billion of debt, translating into a gross gearing ratio of 0.72 times. Nevertheless, its sizeable cash pile kept its net gearing ratio at a more comfortable 0.52 times. Given that the Group is rebuilding its portfolio of investment properties, Sunway’s debt load is envisaged to remain substantial at between RM2.50 billion and RM3 billion in the next 2-3 years. We expect the Group’s gross gearing ratio to hover between 0.70 and 0.80 times, while its net gearing ratio is envisaged to be moderate at around 0.50-0.60 times. Sunway’s operating cashflow debt cover is projected to be weak at between 0.10 times and 0.15 times in the next 2 years. The Group also faces a large, lumpy debt repayment of RM1.14 billion in FYE 31 December 2013 (“FY Dec 2013”).

The Group is also exposed to the inherent cyclicality of the property and construction sectors. It experienced a significant slowdown in property sales particularly in 1Q 2012 amid prevalent softer market conditions. The Group targets full-year sales for FY Dec 2012 to come up to RM1.3 billion – significantly below its historical performance. As it is, Sunway’s unsold stock already rose to RM217.68 million as at end-December 2011 from RM99.35 million a year earlier.

Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my