MARC AFFIRMS ITS RATINGS OF MARC-1(fg)/AAA(fg) ON RIVERSON CORPORATION SDN BHD'S RM200 MILLION CP/MTN PROGRAMME

Dec 11, 2013 -
MARC has affirmed its ratings of MARC-1(fg)/AAA(fg) on property developer Riverson Corporation Sdn Bhd’s (Riverson) RM200 million CP/MTN programme with a stable outlook. The affirmed ratings and outlook are premised on the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) for the programme. Danajamin carries a financial insurer rating of AAA/stable from MARC based on Danajamin’s status as government-sponsored financial guarantee insurer and perceived high support from the government to facilitate greater corporate access to the domestic sukuk and bond markets.
Kota Kinabalu-based Riverson’s standalone credit profile has weakened in the review period mainly due to slower-than-expected sales of commercial units and project construction delay. MARC notes the construction of Riverson’s 10-storey commercial block and the nine-storey private hospital with 250 beds is behind schedule with 27.3% achieved against the scheduled milestone of 34.5% as at end-August 2013. The project, which has a combined gross development value (GDV) of RM604.1 million, was slated for completion by August 2014. While the average take-up rate for the commercial units of 43% as at end-August 2013 has improved from 19% in the previous corresponding period, it remains below the initial forecast of 65%. In particular, the sale of 247 retail lots has remained considerably weak at 28% in spite of a competitive price of RM2,481 psf. Riverson’s 152 SOHO units and 30 office suites have achieved take-up rates of 59% and 83% respectively as at August 31, 2013, although the recent introduction of property market measures could further weigh on sales going forward.   
MARC notes that given that the sale proceeds from the commercial units and progressive payments for the hospital development will largely fund the overall construction costs of RM471 million, weak sales and construction delay could impact project cash flow and timely  project completion. Nonetheless, construction risk is mitigated by the fixed-price construction contract awarded to WCT Construction Sdn Bhd which is expected to incur liquidated ascertained damages (LAD) of RM200,000 per day for the hospital component and RM100,000 per day for the commercial block. For the hospital component, progressive payments amounting to RM73.3 million of the RM165 million have been received from purchaser Jesselton Wellness Sdn Bhd (Jesselton) in which Riverson has a 62% interest. Jesselton’s other shareholders are Sabah state-owned Warisan Harta Sabah Sdn Bhd with 30% and private company Sahamurni Sdn Bhd which owns 8%.
MARC draws comfort from the technical expertise for the hospital construction provided by GEH Management Services (M) Sdn Bhd (GEHM), a wholly-owned subsidiary of Parkway Holdings Limited with significant experience in hospital operations. The collaboration is expected to mitigate hospital construction risks as well as operational concerns given that on completion, the hospital, tentatively known as Gleneagles Kota Kinabalu Medical Centre, is expected to be operated by GEHM under the “Gleneagles” brand. A lease agreement between the parties is expected to be signed closer to the operational date of the hospital in 2Q2015. 
For the financial year ended June 30, 2013 (FY2013), Riverson recorded a revenue increase to RM54.2 million and profit before tax of RM19.3 million (FY2012: RM20.8 million; RM0.1 million) on the back of improved sales of the SOHO units and office suites. The company’s cash and cash equivalent of RM67.6 million (FY2012: RM32.3 million), largely attributable to the drawdown of RM50 million under the CP/MTN programme during the year, is expected to alleviate near-term liquidity concerns. As at end-FY2013, Riverson has RM50 million MTNs due in December 2014 and another RM50 million MTNs due in March 2015. The company could roll over the MTNs on the redemption dates should the outstanding amount remain within the reduction schedule of RM100 million by end-2015. MARC notes that the government has supported Riverson’s project by providing a grant of up to RM47 million through Bank Pembangunan Malaysia Berhad. The grant, of which RM8.8 million has been received as at June 30, 2013, will provide some buffer against slower proceeds from property sales.
Noteholders are, however, insulated from any downside risks associated with the project and Riverson’s credit profile by virtue of the financial guarantee provided by Danajamin. Any changes in the company’s rating will be largely driven by changes in Danajamin’s credit strength.
Contacts:
Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.