MARC AFFIRMS ITS AAAID AND MARC-2ID(CG)/A-ID(CG) RATINGS ON KWANTAS SPV SDN BHD’S RM155 MILLION SUKUK IJARAH AND RM65.0 MILLION MURABAHAH CP/MTN PROGRAMME

Jan 3, 2014 -

MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM20.0 million Class A asset-backed Sukuk Ijarah and MARC-2ID(cg)/A-ID(cg) rating on Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme of up to RM65.0 million. The outlook for the ratings is stable. The rating of Murabahah CP/MTN Programme is equalised with Kwantas Corporation Berhad’s (KCB) long-term and short-term senior unsecured credit ratings of MARC-2/A- with stable outlook taking into account the credit linkages arising from the corporate guarantee extended by KCB for profit servicing and sukuk repayment. There are no outstanding notes under the Murabahah CP/MTN Programme as of October 25, 2013. Kwantas SPV is a special purpose vehicle of KCB, incorporated to facilitate a lease-backed arrangement of 9,048 hectares (ha) of oil palm estates with KCB’s three subsidiaries, Kwantas Plantations Sdn Bhd, Aman Bersatu Sdn Bhd and Benar Bersatu Sdn Bhd which are collectively known as sellers/lessees.

The rating affirmation on the Class A sukuk incorporates the improved collateral coverage of the sukuk supported by securitised estates valued at RM335.8 million based on the estates’ stabilised net operating income (NOI) of RM36.9 million and an assumed capitalisation rate of 11% for the transaction. In addition to Class A’s low LTV ratio of 6.0% as of end-August 2013, the rating is also supported by strong performance of the securitised plantation estates as evidenced by the stable fresh fruit bunch (FFB) production and NOI which exceeds annual sukuk servicing requirements. The stable outlook reflects the expectation that securitised estates will generate sufficient NOI to fund the RM20 million principal repayment on Class A sukuk on May 19, 2014.

Located in Sabah, Malaysia, the securitised estates which presently comprise 8,247 ha of oil palm plantations continue to exhibit stable FFB production of 190,824 metric tonnes (MT) translating to a FFB yield of 23.3 MT/ha in the financial year ended June 2013 (FY2013) compared to FY2012’s 177,139 MT and 21.6 MT/ha. The higher FFB yield was the result of favourable weather conditions in line with the overall improvement in Sabah’s industry average FFB yield to 21.6 MT/ha as compared to 20.4 MT/ha in the previous corresponding period ended June 2012. As 75.8% or 6,254 ha of the planted area are past-prime mature, the securitised estates’ FFB yield is expected to trend downwards. KCB has planned to commence major replanting exercise on the securitised estates in FY2015 subsequent to the maturity of the sukuk programme.

The securitised estates’ NOI decreased significantly to RM39.0 million (FY2012: RM52.2 million) in FY2013, but this remains within MARC’s assumption of stabilised NOI of RM36.9 million. This was mainly attributed to weakness in FFB and crude palm oil (CPO) prices. Despite revenue volatility, MARC expects the lessees to be in a position to meet their obligations under their respective ijarah agreements, as observed during the recent extended period of weaker CPO prices. Additionally, the relatively low remaining principal balance on the sukuk and KCB’s commitment to ensure the timeliness and the adequacy of semi-annual lease payments by the sellers/lessees leads MARC to view the risk of unmet ijarah obligations as low.

The affirmation of MARC’s ratings on Kwantas SPV’s Murabahah CP/MTN balances KCB’s satisfactory cash flow generation ability, moderate leverage and adequate liquidity position against recurring losses incurred by the group’s China-based oleochemicals operations, continued margin pressure faced by KCB’s oil palm production and processing segment and lately muted outlook for CPO prices. In FY2013, KCB’s earnings remained flat evidenced by its pre-tax profit of RM49.8 million (FY2012: RM49.2 million). Higher CPO sales and trading volume (FY2013: 309,687 MT; FY2012: 65,708 MT) and narrowing losses in the China operations (pre-tax losses of RM6.3 million and RM17.7 million in FY2013 and FY2012 respectively) partly offset the impact of weaker CPO prices. KCB’s cash flow generation was satisfactory and ended FY2013 with cash and cash equivalents of RM93.3 million after paying dividends of RM15.6 million. MARC assesses KCB to have moderate financial flexibility based on its unutilised banking facilities of RM287.2 million. Going into 2014, KCB will likely face earnings pressures given largely muted outlook for CPO prices. Also, the rating agency does not envisage any significant improvement in the performance of KCB’s China operations.

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;

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