MARC AFFIRMS ITS AAIS RATING ON ALLOY PROPERTIES SDN BHD’S SUKUK MUSYARAKAH PROGRAMME

Oct 22, 2013 -

MARC has affirmed the rating of Alloy Properties Sdn Bhd’s (APSB) outstanding RM216 million Sukuk Musyarakah Medium Term Notes Programme at AAIS. The rating outlook is stable. The outstanding notes are serviced by APSB’s rental income from its two office buildings and assigned cash flows from sister companies Alloy Toll Management Sdn Bhd (ATM) and Alloy Maintenance Engineering Sdn Bhd (AME). ATM and AME are involved in the provision of toll collection and highway maintenance services respectively for the Kuala Lumpur-Karak Highway (KL-Karak) and Phase 1 of the East Coast Expressway (ECE1).

The affirmed rating is supported by structural elements of the transaction: 1) the predictability and stability of assigned cash flows for debt repayment provided by ATM and AME as well as APSB’s own rental income stream; 2) a debt size and amortisation profile that have been shaped to produce base case coverage metrics with a comfortable headroom against the debt service coverage ratio (DSCR) covenant of 1.75 times (x); and 3) additional credit support from related entity ANIH Berhad (ANIH) to offset the cash flow impact of reduced highway toll rates on ATM’s revenue. The rating incorporates APSB’s credit linkage to ANIH as the concession holder of the KL-Karak and ECE1 and offtaker to ATM and AME.

ANIH is expected to provide more than 70% of APSB’s cash flows over the tenure of the sukuk through ATM and AME. This includes payments made to counter the cash flow impact of the deferment of toll hikes on the KL-Karak and ECE1. The strong credit risk correlation between APSB and ANIH is reflected in the alignment of APSB’s sukuk rating and rating outlook with ANIH’s senior debt rating and rating outlook of AAIS/Stable. ANIH’s sound credit fundamentals are underpinned by the strong competitive positions and stable traffic profiles of its portfolio of matured toll road concessions.

Potential downside risks to APSB’s rating include prolonged vacancy or higher vacancy rate or pressure on rental rates for the Shell Building and/or unexpected cash outflow to fund refurbishment of the building as a consequence of its upcoming lease expiry in March 2014. APSB’s rating is also sensitive to a change in ANIH’s credit rating and the timeliness in the receipt of assigned revenues from ATM and AME.

Since MARC’s last rating review, the head lease for APSB’s Shell Building has been extended further until March 2014. Following the upward revisions to the rental rates of both office buildings, APSB’s rental revenue for the financial year ended March 31, 2013 (FY2013) improved to RM14.1 million, an increase of 4.2% from the revenue of RM16.9 million in the previous 15-month financial year ended March 31, 2012 (15M2012) on an annualised basis. The higher-than-projected traffic volumes registered by the KL-Karak and ECE1 was reflected in ATM’s strong financial performance for FY2013, with pre-tax profit of RM27.1 million on revenue of RM38.8 million (15M2012: pre-tax profit of RM27.6 million; revenue of RM41.6 million). Meanwhile, AME’s pre-tax profit of RM10.8 million on revenue of RM69.9 million compared to the pre-tax profit of RM14.2 million on revenue of RM114.3 million in 15M2012 was modest in response to the lower major maintenance work orders in FY2013.

In FY2013, total cash advances from ATM and AME to APSB amounted to RM33.2 million (15M2012: RM9.8 million), supplementing APSB’s cash flow from operations (CFO) of RM12.6 million (15M2012: RM14.5 million). CFO interest coverage of APSB, ATM and AME on a consolidated basis in FY2013 also remained strong at 3.08x (15M2012: 2.54x). With consolidated cash and cash equivalents of RM83.2 million as at March 31, 2013 (15M2012: RM68.6 million), APSB’s forward-looking DSCR for FY2013 of 2.94x (15M2012: 2.55x) provides ample headroom against the covenanted DSCR. APSB’s strong liquidity buffer provides a reasonable timing cushion for it to secure new tenants for the Shell Building with its upcoming lease expiry in March 2014.

The stable outlook anticipates continued solid coverage of outstanding debt with no significant negative variations in actual performance compared to projected cash flows and timeliness in receipt of revenues assigned for note repayment.

Contacts:

Koh Shu Yunn, +603-2082 2243/ shuyunn@marc.com.my;

David Lee, +603-2082 2255/ david@marc.com.my.