MARC AFFIRMS ITS RATINGS ON TRADEWINDS PLANTATION CAPITAL SDN BHD’S SUKUK IJARAH, BANK- GUARANTEED CP/MTN AND CP PROGRAMMES

Jan 2, 2014 -

MARC has affirmed its AAAIS and AA+IS ratings on Tradewinds Plantation Capital Sdn Bhd’s (Tradewinds Plantation Capital) asset-backed RM180.0 million Class A and RM30.0 million Class B Sukuk Ijarah (collectively the Sukuk) respectively with a stable outlook. Tradewinds Plantation Capital is a special purpose vehicle of Tradewinds Plantation Berhad (Tradewinds) incorporated to act as the funding vehicle of the Sukuk as well as the lessor in the sale and leaseback of the plantation assets consisting of 12 oil palm plantation estates and three palm oil mills (collectively known as the collateral assets). The ratings of the Sukuk reflect the healthy maturity profile of oil palm trees, effective estates management and low loan-to-value (LTV) ratios of securitised assets.

For the first seven months of 2013 (7M2013), the average fresh fruit bunch (FFB) yields of the estates improved to 11.4MT/ha from 10.4MT/ha in line with improved securitised estates maturity profile driven by a higher number of prime mature trees which accounted for 48.5% of the total planted area (7M2012: 43.7%). Supporting the strong FFB yields are favourable weather conditions and better watershed management and tillage. However, the sharp decline in crude palm oil (CPO) selling prices had led to lower net operating income (NOI) generated from securitised estates, from RM59.4 million in 7M2012 to RM33.3 million for 7M2013. On a positive note, the aggregate NOI from Tradewinds Plantation Capital’s estates and mills is still above MARC’s assumed stabilised NOI of RM42.0 million. Based on MARC’s assumed market capitalisation rate of 11.0% and stabilised NOI of RM42.0 million as well as the market value of the mills at RM68.6 million, the securitised assets are valued at RM450.4 million, resulting in a low loan-to-value ratios (LTV) for the Class A and Class B Sukuk Ijarah of 20.0% and 26.6% respectively as at July 31, 2013. The redemption of Sukuk generally has the effect of improving collateral coverage for the sukukholders over time, as evidenced by lower LTV ratios.

Concurrently, MARC maintains its MARC-1ID(bg) / AAAID(bg) ratings on Tradewinds’ Plantation Capital’s RM100.0 million Bank Guaranteed Murabahah Commercial Paper/Medium Term Notes (BG Murabahah CP/MTN) Programme, with a stable outlook. The rating is aligned to MARC’s public information rating of AAA/stable on OCBC Bank (Malaysia) Berhad (OCBCM) which mirrors the credit strength of its Singapore-based parent Oversea-Chinese Banking Corporation Limited (OCBCS) and MARC’s assumption on the high economic importance of the Malaysian subsidiary’s operations to the OCBC group. OCBCS is the second-largest banking group in Singapore and the second-largest financial services group in Southeast Asia by assets. OCBCS has sizeable retail and corporate banking franchise businesses in Singapore and Malaysia. MARC views OCBCS as having excellent asset quality, good core earnings profitability and strong regulatory capitalisation. OCBCS’ conservative practices and sound financial management underpins MARC’s expectations that OCBCS will maintain strong credit fundamentals going forward.

The BG Murabahah CP/MTN holders are insulated from any downside risks in relation to Tradewinds’ credit profile by virtue of the irrevocable and unconditional bank guarantee provided by OCBCM. Any changes in the supported rating or rating outlook will be largely driven by changes in OCBCS’ credit strength.

In addition, MARC has also affirmed its MARC-1ID rating on Tradewinds Plantation Capital’s RM90.0 million Murabahah Commercial Papers (Murabahah CP) with a stable outlook. The rating and outlook of the non-guaranteed Murabahah CP reflect the short-term rating and outlook of Tradewinds. The credit-linked Murabahah CP derives its repayment source from Tradewinds. The ‘MARC-1’ rating reflects the significant available liquidity that Tradewinds has outside of cash flows, which is available to be drawn upon to meet maturing commercial paper. The group’s readily accessible alternate liquidity mitigates Tradewinds’ declining profitability and liquidity, which is the consequence of the downward trend in commodity prices. Tradewinds recorded a 16.6% decrease in revenue in 9M2012 to RM1.84 billion in 9M2013 and a lower net profit of RM25.6 million (9M2012: RM147.6 million). While Tradewinds recorded a higher cashflow from operations (CFO) of RM110.2 million compared to RM67.2 million in 9M2012, it continued to show negative free cash flow, albeit of a small magnitude. Of some concern is the lumpy maturity of Tradewinds’ term loan of RM275.4 million due in 2014.

The stable outlook on the ratings of non-bank guaranteed asset-backed sukuk reflects MARC’s expectations that the securitised estates would continue to meet MARC’s expectations on NOI generation. As the rating on the Murabahah CP relies heavily on Tradewinds’ access to liquidity outside its cash flows, any deterioration of the group’s financial flexibility may result in a revision to Murabahah CP’s rating and outlook, in addition to a meaningful deterioration in the group’s overall business and financial risk profile.

Contacts:

Tan Eng Keat, +603-2082 2265/ engkeat@marc.com.my;

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