RAM reaffirms AAA(fg)/AAA(bg) ratings of Silver Sparrow’s guaranteed debt facility

Published on 30 January 2013

RAM Ratings has reaffirmed the long-term AAA(fg)/AAA(bg) ratings of Silver Sparrow Berhad’s (“SSB” or “the Company”) Guaranteed Medium-Term Notes Programme of up to RM515.0 million (2011/2021) (“the MTNs”); the ratings carry a stable outlook. The enhanced ratings reflect unconditional and irrevocable guarantees extended by Danajamin Nasional Berhad, Malayan Banking Berhad and OCBC Bank (Malaysia) Berhad on a proportionate basis.

SSB is a wholly-owned special-purpose vehicle of Aseana Properties Limited (“Aseana” or “the Group”), incorporated as a funding conduit to facilitate the issuance of the MTNs. The proceeds of the MTNs had been on-lent to 2 of SSB’s sister companies, to refinance and partially fund the development of Phases 3 and 4 of the Sandakan Harbour Square project, i.e. a retail mall (Sandakan Harbour Mall) and a 4-star hotel - Four Points by Sheraton Sandakan (“Four Points Sandakan”), and to fund the acquisition of a soon-to-be completed 482-room hotel in Kuala Lumpur (“KL”) Sentral (Aloft KL Sentral).

Under the transaction structure, Aseana undertakes to ensure that SSB fulfills its obligations in respect of the financial/bank-guarantee facilities which incorporate an undertaking to make good any shortfall in SSB’s cashflow. In addition, Aseana, in a letter of undertaking, agrees to provide sufficient funds or other support to cover all cost overruns in relation to the development of Sandakan Harbour Square. Construction of both components of the project has been completed; the hotel and the mall commenced operations in May and July 2012 respectively. Given Aseana’s undertaking and the importance of the aforementioned properties to the Group, SSB’s credit profile essentially reflects the credit fundamentals of the Group.

Over the medium term, the cashflow-generating ability of Sandakan Harbour Square and Aloft KL Sentral is uncertain as they are either in their early stages of operations or have yet to commence operations. In particular, the properties in Sandakan may require longer gestation periods due to the challenging operating environment. Based on our sensitised cashflow projections, operating cashflow from Sandakan Harbour Square and Aloft KL Sentral is expected to be minimal in the near term. We understand that Aseana plans to sell both properties by 2015 to meet its debt obligations under the MTNs. However, the successful disposal of these properties would ultimately depend on the prevailing market conditions then. Apart from the aforementioned properties, Aseana can also expect cashflow contributions from the sale of the remaining units of the completed SENI Mont’ Kiara as well as the upcoming RuMa Hotel & Residences in Kuala Lumpur over the next few years.

As at end-June 2012, the Group’s gearing ratio increased to 0.58 times from 0.51 times a year earlier as borrowings augmented to USD124 million from USD105 million over the period. Meanwhile, Aseana’s operating cashflow debt cover remained negative despite some improvement due to lighter working capital requirements. Going forward, Aseana may gear up further to finance other upcoming launches in KL and Vietnam, although we are unable to estimate the debt funding requirements at this juncture. Therefore, we expect the Group’s gearing to increase and its debt coverage to remain low, unless cashflow from SENI Mont’ Kiara and RuMa Hotel & Residences turns out strong.

On balance, RAM believes that Aloft KL Sentral should benefit from being the only 4-star hotel within the KL Sentral development. Moreover, Aseana’s exclusive development manager – Ireka Development Management Sdn Bhd – is part of an established property and construction group, from whose experience Aseana will benefit. The Group has also demonstrated its ability to form strategic partnerships with reputable firms in developing property projects, primarily tapping its partners’ more visible branding, market knowledge and extensive networks. In this regard, both Aloft KL Sentral and Four Points Sandakan may benefit from the Starwood Preferred Guest loyalty programme.

Media contact

Thong MunWai

(603) 7628 1022

MunWai@ram.com.my