RAM Ratings reaffirms AA3 rating of Jimah Energy Ventures' Senior IMTN

Published on 26 August 2011
RAM Ratings has reaffirmed the AA3 rating of Jimah Energy Ventures Sdn Bhd’s (JEV or the IPP) RM4.85 billion Senior Islamic Medium-Term Notes Facility (2005/2024) (Senior IMTN); the long-term rating has a stable outlook. JEV is an independent power producer (IPP) that owns and operates a 1,400-MW coal-fired power plant (the Project or the Plant) in Port Dickson, Negeri Sembilan, under a 25-year Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB).



The reaffirmation is premised on JEV’s sturdy business profile, supported by the favourable terms of its PPA with TNB and commendable operating performance to date. Since the commissioning of Units 1 and 2, JEV has been able to claim almost full available capacity payments (ACPs) (consisting of a fixed operating rate and a non-despatch-dependent capacity rate financial or CRF), having kept its operating parameters within the requirements of its PPA. Although the IPP has exceeded its PPA heat-rate limit in certain months last year due to low despatch and frequent start up and shutdown requested by TNB, fuel margin from other months managed to make up for the losses, thus allowing fuel costs to be fully passed through to TNB in fiscal 2010. These, coupled with a well-structured debt-repayment profile, underpin JEV’s healthy debt-servicing ability. Similar to all other IPPs, however, JEV remains exposed to regulatory and single-project risks.

As a third-generation IPP, JEV bears some demand risk. Currently, 85% of its CRF will be guaranteed – subject to meeting certain performance requirements - while the remaining 15% (also known as the daily utilisation payment or DUP) will be paid according to despatch. With effect from the 13th anniversary of the COD of the first unit, the CRF will be reduced to 80% while the DUP will be increased to 20%. Meanwhile, JEV also earns energy payments (EPs) that allow it to fully pass through its coal costs – provided the Plant operates within the allowable heat rates under the PPA. All said, JEV is expected to maintain its healthy debt-servicing ability, as reflected by its projected finance service coverage ratio (FSCR) of at least 1.40 times (with all cash balances, post-distribution) on payment date.

In assessing JEV’s ongoing annual distributions to Special Power Vehicle Berhad (SPV) (via SPV’s subscription of the former’s Junior Debt), RAM Ratings’ projections assume that the IPP will adhere to its financial covenants throughout the Senior IMTN’s tenure (i.e. on a forward-looking basis, as opposed to only the year of assessment).

Media contact
Yean Ni Ven
(603) 7628 1172
niven@ram.com.my

RAM Ratings reaffirms Special Power Vehicle's debt rating

Published on 26 August 2011
RAM Ratings has reaffirmed the A1 rating of Special Power Vehicle Berhad’s (SPV or the Company) RM800 million Class A Islamic Medium-Term Notes Facility (2005/2022) (Class A IMTN); the long-term rating has a stable outlook.



SPV is a special-purpose vehicle set up as a funding vehicle to raise part of the financing required for the development of Jimah Energy Ventures Sdn Bhd’s (JEV or the IPP) coal-fired power plant (the Project or the Plant) - comprising 2 power-generating units, each with a capacity of 700 MW - in Port Dickson, Negri Sembilan. The reaffirmation of SPV’s debt rating is concurrent with that of JEV’s AA3-rated RM4.85 billion Senior Islamic Medium-Term Notes Facility (2005/2024) (Senior IMTN), which has a stable outlook.

SPV’s Class A IMTN is a subordinated project debt since this facility and JEV’s Senior IMTN depend on a single project as their only source of cashflow. RAM Ratings’ approach to rating a subordinated project debt focuses on the extent of its subordination to more senior project debts, and the effective cashflow protection provided to the subordinated debt, i.e. its sub-finance service cover ratio (or sub-FSCR). The sub-FSCR measures the residual cash after meeting the obligations as well as the cash-trap mechanisms and distribution tests of JEV’s Senior IMTN.

The 1-notch difference between the ratings of the Class A IMTN and JEV’s Senior IMTN is premised on the former’s subordination to the latter as well as its strong debt-like features. Furthermore, the rating of the Class A IMTN is supported by the projected minimum and average sub-FSCRs, on payment date, of 1.07 times and 1.26 times, respectively. In assessing SPV’s distributions, RAM Ratings’ cashflow projections assume that the Company will adhere to its financial covenants throughout the tenure of the Class A IMTN (i.e. on a forward-looking basis, as opposed to only the year of assessment). That said, we caution that any excessive distribution will diminish the coverage available for the Class A IMTN.

Media contact
Yean Ni Ven
(603) 7628 1172
niven@ram.com.my

Have your say, in a united voice

How do we define ourselves as a Malaysian? Well, in the spirit of Merdeka, here are videos featuring Malaysians defining Malaysia.

Share similar views? Vote for them! Vote for the video that in your opinion represents Malaysia best and shout it out to your friends. For the first 500 Churpers who voted their favourite video will be rewarded RM1.00!

RAM Ratings reaffirms AA1(bg)/P1 ratings of AEON Credit's RM400 million debt facility, with stable outlook

Published on 25 August 2011
RAM Ratings has reaffirmed the respective long- and short-term ratings of AA1(bg) and P1 for AEON Credit Service (M) Berhad’s (AEON Credit or the Company) RM400 million Conventional and Islamic Commercial Papers/Medium-Term Notes (CP/MTN) Programme, with a stable outlook. The ratings reflect the strength of the unconditional and irrevocable guarantee extended by a consortium of 3 guarantor banks - Bank of Tokyo Mitsubishi UFJ Ltd, Mizuho Corporate Bank Ltd, and Malayan Banking Berhad - based on the weakest-link approach.



AEON Credit provides easy-payment schemes for general purposes, motorcycle purchases and personal financing. It also issues credit cards, with the distinction of being one of the larger non-bank players in the Malaysian consumer-financing industry. The Company represents AEON Credit Service Co Ltd’s (AEON Credit Japan) footprint in the Malaysian consumer-financing market. Through its 58.2%-stake, AEON Credit Japan continues to play a crucial role in the Company’s business direction and strategies.

AEON Credit’s net interest margin remained healthy at 16.95% in FYE 20 February 2011 (FY Feb 2011). The margin is a function of its lending to higher-risk, low-to-medium-income consumers whose debt-servicing capabilities are often more susceptible to adverse changes in economic conditions. The Company’s lucrative margins (which correspond to its commendable profitability ratios) provide a strong buffer against its relatively higher credit costs.

Meanwhile, AEON Credit’s asset quality has remained stable, with its ratio on newly classified impaired loans over average gross loans and credit-cost ratio easing to a respective 5.08% and 5.24% as at FY Feb 2011 (FY Feb 2010: 5.34% and 5.40%). As the Company does not have access to customer deposits, it relies heavily on bank loans and the issuance of private debt securities to meet the funding needs of its lending operations. The Company’s gearing ratio remained largely stable at 2.95 times as at FY Feb 2011 (FY Feb 2010: 2.82 times). Going forward, we expect AEON Credit’s profitability to be sustained, aided by its robust margins and stable loan-loss charges.

Media contact
Joanne Kek
(603) 7628 1163
joanne@ram.com.my

RAM Ratings reaffirms Standard Chartered Malaysia's AAA/P1 ratings

Published on 24 August 2011
RAM Ratings has reaffirmed Standard Chartered Bank Malaysia Berhad’s (Standard Chartered or the Bank) AAA/P1 financial institution ratings. Concurrently, the AAA rating of the Bank’s RM186.2 million Islamic Payment Notes (2004/2011) and AA1 rating of its RM500 million Subordinated Bonds (2007/2017) have also been reaffirmed. All the long-term ratings have a stable outlook.



Standard Chartered is a wholly owned subsidiary of global banking group Standard Chartered PLC (the Group). The ratings reflect the Bank’s healthy asset quality, as well as its established retail and international trade franchise. In terms of financial flexibility, RAM Ratings opines that shareholder support will be forthcoming should the need arise. In addition, Standard Chartered benefits from the Group’s global distribution network and expertise.

The Bank recorded a commendable low gross impaired-loan ratio of 1.5% as at end-March 2011. Meanwhile, its credit-cost ratio of 0.8% in FY Dec 2010 is higher than average, although partly due to Standard Chartered’s prudent provisioning policies. Against the backdrop of a lower deposit base (a result of keen competition) and expanding loan book, the Bank’s loans-to-deposits ratio had been elevated to 85.8% by end-March 2011 (end-December 2009: 70%).

Having recovered from the challenging operating environment in fiscal 2009 and spurred by a 22% loan growth as well as stronger non-interest revenue, Standard Chartered’s pre-tax profit grew 43% to RM572 million in FY Dec 2010. The Bank’s latest reported tier-1 and overall risk-weighted capital-adequacy ratios (RWCARs) came up to a respective 9.7% and 13.9% as at end-March 2011. While its tier-1 RWCAR is low relative to industry benchmarks, RAM Ratings views this as respectable, given the Bank’s asset quality.

Media contact
Joanne Kek
(603) 7628 1163
joanne@ram.com.my

RAM Ratings reaffirms Formis' ratings, maintains negative outlook

Published on 24 August 2011  
RAM Ratings has reaffirmed the respective long- and short-term ratings of BBB1 and P2 for Formis Resources Berhad’s (Formis or the Group) RM80 million Murabahah Underwritten Notes Issuance Facility/Islamic Medium-Term Notes Facility (2005/2012) (MUNIF/IMTN). At the same time, the negative outlook on the long-term rating has been maintained. Formis is involved in a diversified range of information, communication and technology (ICT) products and services.



The negative rating outlook reflects our concerns on Formis’ weakened business profile and profit-generating ability. Although there have been some signs of improvement for its subsidiary ISS Consulting Solutions Berhad (ISS), the recovery has taken longer than anticipated and its losses were larger than expected. Meanwhile, we have a negative view on Formis’ recent acquisition of a 20.6%-stake in Ho Hup Construction Company Bhd (Ho Hup), which is in an unrelated business. The investment may take a toll on the Group’s already-depressed profit performance, given Ho Hup’s years of loss-making position.

In FYE 31 March 2011, Formis suffered an operating loss before interest and tax of RM35.46 million. This was mainly due to increased costs following acquisition of ISS, as well as RM33.10 million of goodwill impairment and RM4.60 million of impairment loss on trade receivables. Adjusting for the consolidation of ISS and impairment of goodwill, Formis would have performed better with an operating profit of RM14.72 million and a pre-tax profit of RM13.99 million.

Despite the operating losses, Formis still has a healthy balance sheet and a strong liquidity profile. The Group’s debt level eased from RM90.06 million as at end-March 2010 to RM76.23 million as at end-March 2011. Correspondingly, its gearing ratio improved to 0.37 times while retaining its net-cash position. Elsewhere, its liquidity position is supported by its large cash balances of approximately RM80 million as at the same date.

Looking ahead, Formis’ gearing ratio is expected to hover around 0.5 times. “In addition to its RM16.8 million acquisition cost for a 20.6%-stake in Ho Hup, the Group is also anticipated to invest RM21 million to subscribe for Ho Hup’s rights issue. The latter is part of Ho Hup’s restructuring plan,” opines Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Given Formis’ intention of maintaining a minimum 20% post-dilution equity in Ho Hup, the Group’s gearing ratio may weaken further if it incurs more debt to increase its stake in Ho Hup,” adds Kevin.

Meanwhile, Formis’ ratings continue to be supported by its established reputation after having been in the Malaysian ICT industry for more than 2 decades, with niches in the government, telecommunications and financial services sectors. However, the Group’s ratings are moderated by its inherent need to secure new contracts to replenish its order book and sustain its growth amid the competitive ICT industry.
The ratings could face downward pressure if Formis’ business and/or financial profiles deteriorate further, i.e. the Group continues to be in the red. On the other hand, the rating outlook may be revised to stable if Formis is able to improve its operating performance by sustaining or augmenting its order book and stemming ISS’ losses.

Media contact
Low Li May
(603) 7628 1175
limay@ram.com.my

RINGGIT Newsletter (June issue) is now available for download

RINGGIT is a joint-effort publication between Bank Negara Malaysia and FOMCA and it is a monthly publication. The highlight for this month is "Waspada dengan Pelaburan Skim Cepat Kaya". This publication is in Bahasa Malaysia.

Click on the link below to get the latest issue:

http://www.bnm.gov.my/documents/6_Ringgit_Newsletter.pdf

RAM Ratings reaffirms The Royal Bank of Scotland Berhad's AA2/P1 ratings

Published on 22 August 2011
RAM Ratings has reaffirmed The Royal Bank of Scotland Berhad’s (RBS Berhad or the Bank) long- and short-term financial institution ratings at AA2 and P1, respectively. Concurrently, the rating of the Bank’s RM200 million Subordinated Negotiable Instruments of Deposit has been reaffirmed at AA3. Both long-term ratings have a stable outlook. The 1-notch difference between the long-term ratings reflects the subordination of the debt facility to the claims of senior creditors.



RBS Berhad is a 100%-owned subsidiary of The Royal Bank of Scotland Group plc (the Group). The Bank closely adheres to its parent’s strategies and risk-management framework, while leveraging on its global presence. Notably, RBS Berhad has retained its core business in global banking and markets, providing wholesale banking products and services, following the Group’s decision to exit the retail as well as small- and medium-sized enterprise businesses in 2010.

The aforesaid decision had resulted in the Bank suffering a pre-tax loss of RM7.42 million in FYE 31 December 2010 (FY Dec 2010) (FY Dec 2009: RM10.72 million pre-tax profit), after having incurred related redundancy costs and fixed-asset write-offs.

Going forward, earnings are expected to be more volatile as non-interest income will account for the bulk of RBS Berhad’s income. Its gross income in 1Q FY Dec 2011 almost exclusively consisted of such income and helped RBS Berhad chalk up a pre-tax profit of RM28.50 million. With lending now only constituting a complementary business, the contribution of interest income proved negligible for the quarter.

Meanwhile, RBS Berhad has preserved its sturdy liquidity profile and satisfactory capital position. The Bank holds highly liquid assets such as government-related securities; its liquid-asset ratio still exceeds 100%. As at end-March 2011, its tier-1 and overall risk-weighted capital-adequacy ratios stood at a respective 9.85% and 13.62%.

Given that the Bank’s ratings take into account strong parental support, RAM Ratings will maintain close monitoring on the latest developments involving the Group, with a view to re-evaluating RBS Berhad’s credit ratings if need be. Despite the improvements in the Group’s financials last year, we remain cautious about the progress of its recovery from the global financial crisis in light of its exposure to various external factors, particularly in Europe and the United States.

Media contact
Shankar Jayanathan
(603) 7628 1030
Shankar@ram.com.my

RAM Ratings upgrades KLK's ratings to AA1/P1

Published on 22 August 2011
RAM Ratings has assigned respective preliminary long- and short-term ratings of AA1 and P1 to Kuala Lumpur Kepong Berhad’s (KLK or the Group) proposed RM300 million Sukuk Ijarah Commercial Paper/Medium-Term Notes Programme (2011/2016); the long-term rating has a stable outlook.



At the same time, the long-term rating of the Group’s existing RM500 million Sukuk Ijarah Commercial Paper/Medium-Term Notes Programme (2007/2012) has been upgraded from AA2 to AA1 while the rating outlook has been revised from positive to stable. Meanwhile, the short-term rating of the debt facility has been reaffirmed at P1.

“The upgrade for the long-term rating is premised on KLK’s solid operating and financial track records over the past 5 years. The Group’s planted oil-palm hectarage has expanded almost 50% during this period. Its healthy tree-maturity profile and lean cost structure have further boosted KLK’s cashflow and earnings.

In the meantime, the Group has more than doubled its oleochemical production capacity via domestic expansion and overseas acquisitions; KLK is now one of the largest oleochemical producers in Europe. These achievements are supported by a conservative balance sheet,” notes Shahina Azura Halip, RAM Ratings’ Head of Real Estate and Construction Ratings. “Going forward, we expect KLK to maintain its commendable operating and financial profiles. Its gross gearing ratio is expected to be kept below 0.3 times, supported by a strong funds-from-operations debt cover of between 0.56 and 1.93 times over the next 5 years,” she adds.

KLK is one of the largest established plantation players, with more than 250,000 hectares of plantation land in Malaysia and Indonesia. Its established track record in the plantation sector is reflected by its commendable operating efficiency and lean cost structure; KLK is one of the lowest-cost producers in the industry. Moving ahead, KLK’s performance will remain supported by continued demand for crude palm oil from increasing food consumption and the world’s constantly expanding population.

On the other hand, KLK’s ratings are moderated by its ambitious expansion into oleochemicals; this industry is vulnerable to high feedstock prices and overcapacity, particularly in basic oleochemicals. In this regard, RAM Ratings believes that KLK’s management will take a measured approach and maintain its robust balance sheet. The industry is characterized by volatile CPO prices which largely dictate the bottom-line of oil palm-based companies, like KLK. Being a commodity, CPO prices are subject to many factors that are beyond the planters’ control. Other moderating factors include the inherent cyclicality of the property and retail sectors and operations risk from foreign ventures.

Media contact
Chan Yin Huei
(603) 7628 1180
yinhuei@ram.com.my

Open letter to Sir Alex Ferguson - Star, Saturday August 20, 2011

Article that came out of the Star newspaper on Saturday August 20, 2011.

Here are 12 reasons for a Manchester United IPO in Malaysia.

Dear Sir Alex,

I realise I should be addressing the Glazer family, the ultimate owners of the Manchester United Football Club, but they're Americans; it's painful to discuss football with people who insist on calling the sport soccer'. Sure, I could write to chief executive David Gill. Then again, he's essentially a backroom boy and a bean counter. Bringing this up with him is no fun either.



The fact is, you're the club's heart and soul, and its face as well. You're the longest serving United manager, and in your 25 years at Old Trafford, you and the team have won almost everything there is to be won in club football. If you had not joined the Red Devils, the United fans would have nothing but past glory to sustain their love for the club.

In other words, they would be more like Liverpool fans.

That's why this open letter is for you. I believe you, more than anyone else, can appreciate what I'm strongly recommending for United. Plus, I suspect that if you tell the Glazers something, chances are they will sit up and take notice.

Early this week, I was surprised (and I must admit, a little hurt) to read that United is planning a US$1bil (RM3bil) initial public offering (IPO) in Singapore by the end of the year.

The choice of a listing in Asia is understandable. The English Premier League (EPL) has a huge following in the region, and United is arguably the most popular of the EPL clubs. But why Singapore, which was reportedly picked over Hong Kong? Apparently, Malaysia wasn't even on the shortlist.

I say United should float its shares on Bursa Malaysia, the stock exchange here. I'd like to think that it's not too late to convince the Glazers to reconsider.

Typically, owners list their businesses where they think they can get the best valuation for their equity. Now, Sir Alex, you know a thing or two about putting a price on assets, what with all the players you have signed and sold over the years. It's all about the asset going to where it's most wanted and most likely to do well.

Here are 12 reasons one for each Premiership title you have collected for a United IPO in Malaysia:

1. We know how to value the game
Football betting in Malaysia generates tons of money, and we have a reputation as a hub for this activity. Although it's all illegal, it shows that this country has the know-how and experience to properly appreciate the worth of United shares.

2. No shortage of sponsors
Did you know that a Malaysian company is among the club's official sponsors, but there's none from Singapore? Telekom Malaysia Bhd and United have signed a five-year contract “linking the two brands in marketing campaigns and promotions throughout Malaysia”. Relative to our size, businesses in Malaysia are very generous supporters of sports. Not one, but three teams in Formula One racing have significant Malaysian involvement. If United lists in Malaysia, there will immediately be a queue of local companies eager to slap their logos on United property and merchandise.

3. Our tycoons understand the football business
In May last year, a Malaysian consortium, including Tan Sri Vincent Tan of the Berjaya group, acquired 36.4% of Cardiff City. Datuk Chan Tien Ghee is now the club's chairman. AirAsia Bhd's Tan Sri Tony Fernandes had failed in a bid to take over West Ham United, but he persisted. He just became a majority shareholder of Queens Park Rangers, another London club. These developments say plenty about how serious we in Malaysia are about the EPL.

4. Investor relations will be a breeze
Be assured that United will have no problems getting the attention of the investing community in Malaysia. Every briefing for analysts, investors and the media will surely be packed. Each announcement is likely to be picked up and publicised. People here just can't get enough of United.

5. Western-owned businesses are highly prized
Investors in Malaysia are willing to pay a lot for a piece of a company controlled by a big name from the West. Among the most expensive stocks on Bursa Malaysia, in absolute terms, are British American Tobacco (M) Bhd, Nestle (M) Bhd, DiGi.Com Bhd (a subsidiary of Norway's Telenor), Dutch Lady Milk Industries Bhd, Guinness Anchor Bhd, and Shell Refining Co (Federation of Malaya) Bhd. They're all above RM10 per share. Given United's fantastic brand visibility, its shares can surely reach such a lofty price level.

6. No profit track record, no problem
It has been suggested that one reason United prefers Singapore to Hong Kong for an IPO is that the latter has tougher listing qualifications. You won't have that issue in Malaysia either. Assuming the club isn't making profits currently and thus can't pass the profit test under the Securities Commission's Equity Guidelines, it can take another route for listing in Malaysia the market capitalisation test. All United needs is a total market capitalisation of at least RM500mil upon listing. If the US$1bil Singapore listing is for 30% of United's equity, the club is estimated to have a market value of US$3.3bil (RM10bil).

7. Loss-making, debt-laden businesses don't scare us
It was reported in March that United's parent company, Red Football Joint Venture Ltd, made a record loss of 108.9mil (RM533.6mil) for financial year ended June 2010, while total debt stood at 590.4mil (RM2.9bil). Over here, the probable response to that bit of news is a barely stifled yawn and a shrug of the shoulders. So what? Our investors aren't particularly averse to investing in companies engulfed in red ink and stacks of IOUs. Let's just say Malaysians recognise that to get great returns, they need to take on great risks.

8. Tune Group is Malaysian
The next time you have a gentle yet heartfelt discourse with a Premier League referee regarding your philosophy on the application of football rules, take a good look at his sleeves. The logo is that of Tune Group, Malaysia's own lifestyle and entertainment brand. I'm not saying that more refereeing decisions will go United's way just because the club's shares are listed on Bursa Malaysia, but never underestimate the power of 1Malaysia.

9. We're not a nation of whistleblowers
Considering your several run-ins with referees, I think you may fancy the idea that Malaysians are generally reluctant to blow the whistle. In fact, we had to change the laws recently to encourage whistleblowing. But relax, it may be a while before you see a lot of that going on here.

10. Red is fine with us
Unlike in Thailand or, say, Los Angeles, red is a broadly acceptable colour in Malaysia. It has no links to politics or gang identity. I note that your away kit for the current season is mostly blue. That's okay too.

11. Staunch support for United in Malaysia
The Red Devils' fans here are a very passionate and participative lot. This is evident in cyberspace. For example, the forum section of a website that calls itself the Manchester United Fan Club Malaysia Portal, has 8,000 members and 445,000 posts. Almost 9,400 people liked' its Facebook page. But that's not a lot compared with the more than 42,000 likes' for the Manchester United FC (Malaysia) Facebook page. And this is probably only the tip of the iceberg. Don't you think such a devoted support base should be rewarded with a United IPO?

12. Our PM is a big fan
It's widely known that Prime Minister Datuk Seri Najib Tun Razak, who's also Finance Minister, has been supporting United for a long time. On his Facebook page, “watching Manchester United games” is listed first among his favourite activities. On the other hand, his Singapore counterpart, Lee Hsien Loong, “enjoys reading, walking, listening to classical music and tinkering with computers”. That's on his CV on the Singapore Cabinet website. Really, need I say more?

Yours sincerely,
Errol

● Executive editor Errol Oh is a fair-weather fan of Tottenham Hotspur. He doesn't believe in blind loyalty. If the team is not doing what it's supposed to, it doesn't deserve support.

MARC PLACES MTD INFRAPERDANA BHD'S RM700 MILLION ISLAMIC MEDIUM TERM NOTES PROGRAMME RATING OF AAID ON MARCWATCH DEVELOPING

Aug 22, 2011 -
MARC has placed its AAID long-term rating on MTD InfraPerdana Bhd’s (MTD InfraPerdana) RM700.0 million Islamic Medium Term Notes (IMTN) Programme on MARCWatch Developing. The MARCWatch placement follows recent developments pertaining to the group’s toll road concessions, the proposed sale of the concession assets to related parties and retirement of its existing debt.



MTD InfraPerdana, which is wholly-owned by MTD Capital Bhd (MTD Capital), holds the concession for the Kuala Lumpur – Karak Highway (KL-Karak), the East Coast Expressway Phase 1 (ECE1), the East-West Link Expressway (EWL) and the Kuala Lumpur – Seremban Expressway (KL-Seremban) through its wholly-owned subsidiaries, MTD Prime Sdn Bhd (MTD Prime) and Metramac Sdn Bhd (Metramac). On January 28, 2011, the government announced a freeze on toll rate increases for the KL-Karak and ECE1 until January 1, 2015 and the early termination of the EWL concession on May 15, 2011. MARC expects cash flow coverage for the debt metrics to deteriorate as a result of the reduced toll revenues based on its preliminary analysis of the credit impact of the toll rate freeze and the early termination of the EWL concession. This is, however, not expected to result in MTD InfraPerdana’s credit metrics falling out of line with the current issue rating.

Of more immediate concern and greater credit implication to MARC is the proposed acquisition of the entire business and undertaking of MTD Prime and Metramac for RM3.525 billion cash by MTD Capital’s group executive chairman and its president/CEO through a special purpose vehicle. MTD InfraPerdana is expected to retire all of the outstanding notes issued under the rated facility upon completion of the asset disposal.

MARC will continue to monitor developments relating to the corporate exercise and comment as more information becomes available.

Contacts:
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my;
Jason Kok, +603-2082 2258/ jason@marc.com.my.

RAM Ratings reaffirms Cagamas' AAA/P1 ratings

Published on 19 August 2011
RAM Ratings has reaffirmed Cagamas Berhad’s (Cagamas or the Company) respective long- and short-term corporate credit ratings at AAA and P1. Concurrently, the AAA and P1 ratings of Cagamas’ RM40 billion Islamic and Conventional Medium-Term Note (MTN) Programme as well as its RM20 billion Islamic and Conventional Commercial Paper (CP) Programme have also been reaffirmed. The AAA/P1 ratings of the Company’s RM5 billion Islamic MTN Programme and Islamic CP Programme have also been reaffirmed. All the long-term ratings have a stable outlook.



The ratings reflect Cagamas’ systemic importance in the domestic capital markets, robust receivables profile, and solid capitalisation. The Company plays the strategic role of a liquidity provider to various institutions and is also the leading issuer of private debt securities in Malaysia. Given Cagamas’ leading role and systemic importance to the Malaysian financial markets, we believe that government support will be readily extended, if required.

Cagamas has healthy asset quality, underpinned by highly rated counterparties within the “purchase with recourse” (PWR) portfolio, and direct salary deductions for financing facilities under its “purchase without recourse” scheme. Some 89% of the Company’s PWR exposures are to entities with at least AA ratings. Given the strong receivables profile, there were zero impairment charges for bad credits in fiscal 2010.

In terms of profitability, Cagamas’ net interest margin (inclusive of income from Islamic operations) stood at 1.6% in fiscal 2010; return on assets came in at 1.4% for the same period. We note that the Company’s profitability will remain driven by market conditions, including the interest-rate cycles and liquidity conditions, as well as its pricing strategies and risk-management policies. Cagamas’ capital position remained healthy as at end-December 2010, with an overall risk-weighted capital-adequacy ratio of 20.8%.

Cagamas’ initial business model, based on providing liquidity to the banking sector, is less relevant in a scenario of ample liquidity. The potential consolidation of the banking sector – which would effectively shrink Cagamas’ clientele – and banks’ priority of balance-sheet expansion are other factors that may affect its businesses. That said, Cagamas’ loan acquisition schemes remain as alternative avenues for financial institutions to manage their liquidity and capital positions, in view of the rising interest rate environment. “While the Company’s risk profile could change as it explores new business opportunities, we draw comfort from the management’s intention to explore areas of growth that complement its core expertise,” notes Siew Suet Ming, RAM Ratings’ Head of Structured Finance Ratings.

Media contact
Peter Su
(603) 7628 1036
petersu@ram.com.my

MARC DOWNGRADES TANJUNG LANGSAT PORT'S RATINGS TO A-IS and MARC-2ID/A-ID; OUTLOOK NEGATIVE

Aug 18, 2011 -

MARC has downgraded its ratings on Tanjung Langsat Port Sdn Bhd’s (TLP) RM250 million Sukuk Musyarakah Bonds (Sukuk Musyarakah) and RM135 million Musyarakah Commercial Papers/Medium Term Notes Programme (MCP/MMTN) to A-IS and MARC-2ID/A-ID from AA-IS and MARC-1ID/AA-ID respectively. The outlook on the ratings remains negative.



The downgrades reflect further erosion of TLP’s credit and operating profile during 2010 due to the still lingering effects of the 2008 fire incident at its tank terminal complex and its depleting unencumbered land bank. Its larger-than-expected revenue decline and operating cash flow deficit in 2010 raises concerns over its cash flow and liquidity risks related to certain long outstanding balances due to its contractors for port construction and dredging works. In light of its depleted unencumbered land bank and current operating challenges, MARC expects TLP to become increasingly dependent on liquidity support from parent, Johor Corporation (JCorp), to fund cash flow and debt service shortfalls. The negative outlook on the ratings reflects increased concerns over TLP’s ability to stem its operating losses and cash flow deficits.

MARC understands that although one of the eight tanks at TLP’s tank terminal complex was certified as ready for operations in March 2010 followed by four more tanks in May 2010 and the sixth tank in early 2011, the storage facilities are currently not in use by the sole lessee, Trafigura Pte Ltd. MARC has been informed that the remaining two tanks which were earlier damaged by fire should be ready to resume operations by end-2011. Consequently, TLP’s tank terminal complex operations have not generated any revenue since the fire incident in August 2008, resulting in estimated monthly revenue losses of RM0.55 million. TLP recently sold its remaining unencumbered land holdings, raising total proceeds of RM134.9 million to partially pay down the RM216.1 million due to contractors. The company urgently needs to restore its cash flow and earnings through higher utilisation of its tank terminal complex, and dry and liquid cargo wharves beginning from the second half of 2011 to maintain compliance with its financial covenants and to meet its 2012 note maturities of RM20.0 million. MARC foresees that TLP will require further financial support from its parent to maintain compliance with its financial covenants.

Based on its latest consolidated audited financial statements ended December 31, 2010, TLP’s revenue declined to RM63.59 million (FY2009: RM100.15 million) due to lower land sales. Higher administrative expenses and finance costs, as well as RM14.7 million of write-offs from insurance receivables relating to the fire incident led TLP to record pre-tax losses of RM24.3 million (FY2009: pre-tax profit of RM16.1 million). TLP has initiated legal proceedings against its insurer on May 5, 2011 to recover these sums. MARC notes the conversion of amounts due to TLP’s parent into equity during 2010 which had the effect of lowering TLP’s debt-to-equity ratio to 1.68 times (FY2009: 3.33 times) against its covenanted debt-to-equity ratio of 4.0 times. At the same time, the rating agency considers the parent’s probability of providing further support as low to moderate in light of JCorp’s own heavy debt burden.

MARC will continue to monitor TLP’s operating trends as well as key financial metrics and will consider revising the outlook to stable if TLP is able to stabilise its financial and operating performance, and halt further erosion in its credit profile. To maintain its current ratings, TLP needs to demonstrate that it can generate adequate earnings and operating cash flow on a consistent basis. The ratings may be lowered if TLP is unable to stabilise its performance in the near-term and turn itself around.

Contacts:
David Lee, +603-2082 2255/ david@marc.com.my ;
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my ;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my .

RAM Ratings reaffirms Mukah Power's debt ratings

Published on 17 August 2011
RAM Ratings has reaffirmed the respective AA3 and A2 ratings of Mukah Power Generation Sdn Bhd’s (MPG or the Company) Senior Sukuk Mudharabah Programme of up to RM665 million (2006/2021) (Senior Sukuk) and Junior Sukuk Mudharabah Programme of up to RM285 million (2006/2031) (Junior Sukuk); both long-term ratings have a stable outlook. The 2-notch rating distinction between the Senior and Junior Sukuk reflects the Junior Sukuk’s subordination in terms of cashflow priority as well as its strong equity-like features.



MPG is an independent power producer (IPP) incorporated to construct, own, operate and maintain a 270-MW coal-fired power plant (the Plant) in Matedeng, Mukah Division, Sarawak, under a Power Purchase Agreement (PPA) with Syarikat SESCO Berhad (SESCO). The Company is viewed to have a strong business profile, underscored by the favourable terms of its PPA with SESCO. MPG is entitled to earn full capacity payments (CPs) irrespective of the quantum of electricity generated, subject to meeting certain performance requirements. It also qualifies for energy payments (EPs) on electricity sold to SESCO, with a partial guarantee on EPs from the minimum take-or-pay obligation of 1,400 million kWh per year (equivalent to an estimated load factor of 77%).

The Plant clocked in higher-than-expected scheduled maintenance hours in FYE 31 December 2010 (FY Dec 2010) and 1Q FY Dec 2011. This had been due to a major inspection that had taken longer than expected, and also more scheduled maintenances carried out on SESCO’s requests. The downtime had caused the rolling equivalent availability factor (EAF) of the Plant to dip below the PPA threshold of 85%, which had subsequently kept MPG from claiming full CPs. For FY Dec 2010, MPG earned RM3.62 million less CPs from a potential RM110.81 million - albeit within RAM Ratings’ expectations. In 1Q FY Dec 2011, the shortfall in CPs came up to RM2.36 million. In this regard we highlight that the PPA requirement of maintaining a rolling EAF of more than 85% leaves little room for further outages – both scheduled and unscheduled – in the near term, thus rendering MPG susceptible to further shortfalls in CPs.

Based on RAM Ratings’ sensitivity analysis, which includes capacity degradation after a decade of operations, reductions in plant availability and load levels, MPG is expected to generate an annual pre-financing cashflow of RM92 million to RM110 million. We have also assumed the Company’s distributions to shareholders will be made while adhering to its financial covenants throughout the tenures of the Senior and Junior Sukuk (i.e. on a forward-looking basis, as opposed to only the year of assessment). As such, MPG’s Senior Sukuk Service Coverage Ratio (Senior SSCR) (with cash balances, post-distribution and calculated on principal repayment dates) is expected to reach a minimum of 1.51 times and an average of 1.66 times throughout the tenure of the Senior Sukuk. Additionally, our analysis indicates that the expected minimum and average Sub-Finance Service Coverage Ratios (Sub-FSCRs), which measure the Junior Sukuk’s repayment coverage, will come up to 1.03 times and 1.13 times, respectively, throughout the tenure of the Senior Sukuk. We note that excessive distributions in the near term, although allowed under the distribution covenants, may weaken the Company’s debt coverage in the future.

Media contact
Adelia Abdul Rahim
(603) 7628 1055
adelia@ram.com.my

RAM Ratings reaffirms AAA(fg) rating of BerjayaCity's MTN programme

Published on 17 August 2011
RAM Ratings has reaffirmed the enhanced rating of BerjayaCity Sdn Bhd’s (BCity or the Company) RM150 million Danajamin-Guaranteed Medium Term Notes Programme (MTN) at AAA(fg) with a stable outlook. The enhanced rating reflects the irrevocable and unconditional financial guarantee by AAA/P1-rated Danajamin Nasional Berhad (Danajamin). The backing of the financial guarantee enhances the credit profile of the MTN beyond BCity’s stand-alone credit risk. Under this structure, all risks associated with the MTN are expected to be absorbed by Danajamin.



BCity is primarily involved in oil-palm plantations. The Company’s ultimate parent is Berjaya Corporation Berhad (BCorp), a conglomerate with interests in a vast array of businesses.

BCity is a small player within the oil-palm plantation industry, with a planted area of 4,929 hectares (ha) as at end-April 2011. The Company has a track record of healthy fresh fruit bunches yields of above 20 metric tonnes per mature ha, slightly higher than the industry average. However, its production costs are high compared to rated peers due to higher harvesting and labour costs arising from its estates’ hilly terrains as well as its large proportion of older and taller palms.
As at end-FY Apr 2011, BCity remained highly leveraged with a gearing ratio of 1.76 times. Its funds from operations debt coverage ratio, however, improved to 0.11 times arising from favourable crude palm oil prices during the review period (end-FY Apr 2010: 0.05 times). Over the next 3 years, the Company’s balance sheet metrics are envisaged to be weak, with projected gearing levels of about 1.6 times and projected operating cashflow debt coverage of between 0.04 times to 0.10 times.

Nonetheless, BCity derives financial flexibility from the support of its ultimate parent, BCorp, which has previously extended financial backing to the Company and has also provided a corporate guarantee to Danajamin on the MTN. As at end-April 2011, advances from BCorp to BCity summed up to RM178 million.

Media contact
Anne Yap
(603) 7628 1038
anne@ram.com.my

RAM Ratings reaffirms AAA(bg) rating of ADCB Cayman's RM3.5 billion debt facility

Published on 15 August 2011
RAM Ratings has reaffirmed the AAA(bg) rating of ADCB Finance (Cayman) Limited’s (ADCB Cayman) RM3.5 billion Medium-Term Notes Programme (MTN Programme); the long-term rating has a stable outlook. The AAA(bg) rating of ADCB Cayman’s MTN Programme reflects the strength of the irrevocable and unconditional guarantee provided by ADCB on all amounts due under the medium-term notes.



ADCB Cayman is wholly owned by ADCB and is a funding conduit for the latter. ADCB is a diversified full-service bank in the United Arab Emirates (UAE), ranking the third-largest in terms of assets. The Government of Abu Dhabi owns a 58.1%-stake in the Bank via Abu Dhabi Investment Council. ADCB’s ratings remain underpinned by its strong connection to the governments of both Abu Dhabi and the UAE, coupled with its superior capitalisation position.

For more on ADCB, please refer to the press release “RAM Ratings reaffirms Abu Dhabi Commercial Bank’s AAA/P1 ratings”, published on 15 August 2011.

Media contact
Shankar Jayanathan
(603) 7628 1030
shankar@ram.com.my

RAM Ratings reaffirms P1(bg) rating of Ipmuda's debt facility

Published on 15 August 2011

RAM Ratings has reaffirmed the P1(bg) rating of Ipmuda Berhad’s (Ipmuda or the Group) RM30 million Bank-Guaranteed Commercial Papers Programme (2007/2012). The rating reflects the unconditional and irrevocable guarantee extended by RHB Bank Berhad, which enhances the credit profile of the debt issue beyond Ipmuda’s inherent or stand-alone credit standing.  



Ipmuda principally trades in building materials such as steel and cement. The Group is also involved in fluid engineering systems, the contracting and assembly of industrial control instruments, the manufacture and supply of kitchen cabinets and wardrobes, as well as property development. 

Ipmuda has a wide distribution network and enjoys good relationships with its suppliers, mostly local cement and steel players to ensure a steady supply of stocks. However, the Group’s stand-alone credit profile is moderated by the competitive domestic building-material trading industry and the inherent cyclicality of the construction and steel industries. Furthermore, the Group is also vulnerable to fluctuations in the prices of building materials, especially steel. Ipmuda’s historically volatile earnings and razor-thin operating margins reflect these challenges.

Ipmuda’s turnover slipped 6.6% year-on-year in FYE 31 December 2010 (FY Dec 2010), depressed by lower sales of steel bars and subdued exports of steel billets. A sales mix which was skewed towards lower-yield items had resulted in a narrower operating profit before depreciation, interest and tax margin of 0.65% (FY Dec 2009: 1.83%). A result of its overall weaker performance, Ipmuda’s cashflow protection measures deteriorated from a moderate funds from operations debt coverage (FFODC) ratio of 0.20 times as at end-FY Dec 2009 to 0.02 times as at end-FY Dec 2010. Looking ahead, RAM Ratings is cautiously optimistic that the Group should perform more favourably, supported by the potential pick-up in demand for building materials underpinned by a series of positive developments under the Economic Transformation Programme and Tenth Malaysian Plan. However, this depends on the timing of the successful roll out of these sizeable projects.

Meanwhile, the Group’s balance sheet remains manageable with a gearing ratio of 0.48 times as at end-December 2010. Barring any significant ramp-up in borrowings, Ipmuda’s gearing ratio is expected to hover at around 0.6 times over the medium term. Going forward, the Group plans to revive its stalled property development project in Kota Kinabalu, Sabah. “Should the entire RM25 million of construction costs for this project be debt funded, Ipmuda’s gearing ratio could weaken to about 1 time. Against the higher debt level, the Group’s FFODC could deteriorate from its envisaged moderate level to less than 0.1 times,” notes Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings. “Furthermore, property development is not Ipmuda’s core business. We caution that managing this business could introduce additional operational risk to the Group.”

Media contact
Evelyn Khoo
(603) 7628 1075
evelyn@ram.com.my

MARC AFFIRMS ITS ISSUE RATINGS ON PKFZ-RELATED DEBT ISSUANCES; OUTLOOK NEGATIVE

Aug 12, 2011 -
MARC has affirmed the following issue ratings on the outstanding bonds and notes backed by deferred payment receivables due from Port Klang Authority (PKA) for the acquisition cost of land and development works in connection with the Port Klang Free Zone (PKFZ) project:



1. Long-term rating of AAA on Special Port Vehicle Berhad’s (SPV) RM1,310.0 nominal amount asset-backed serial bonds facility; and
2. Long and short-term ratings of AAA and MARC-1 on Transshipment Megahub Berhad’s (TMB) RM1,095.0 million fixed rate serial bonds and RM360.0 million Commercial Papers/Medium Term Notes (CP/MTN) Programme.

The outlook on all of the aforementioned issue ratings remains negative.
The affirmed ratings reflect uncertainty over long-term government support for the above mentioned debt issuances which continues to be fuelled by negative public sentiment surrounding the bailout of bondholders and the ongoing legal proceedings by Port Klang Authority (PKA) against Kuala Dimensi Sdn Bhd (KDSB), the turnkey contractor and vendor of the land for the PKFZ project.

The PKFZ project is a federal government initiative to transform Port Klang into a regional transhipment hub through the development of a 1,000-acre commercial and industrial zone in Pulau Indah, adjacent to Port Klang’s Westport. Subsequent to the initiation of the project, the government, via the Ministry of Transport (MOT), issued four letters of support for deferred payment receivables from PKA for the land purchase and development costs of PKFZ. PKA is under the direct purview of the MOT. The issuers are special purpose entities (SPEs) established for the sole purpose of issuing debt backed by receivables from PKA. While SPV’s bonds are backed by receivables from PKA for the acquisition of leasehold land on Pulau Indah from KDSB, TMB’s bonds and notes are backed by PKA’s deferred payment obligations in respect of project development works undertaken by KDSB.

PKA has been meeting its deferred payment obligations to the SPEs, facilitating the retirement of debt issued by two other SPEs, namely, Valid Ventures Berhad and Free Zone Capital Berhad and continued paydown of SPV and TMB’s debt maturities. More recently, on June 30, 2011, PKA made payments of RM150 million and RM230 million to the respective designated accounts of SPVB and TMB. MARC considers the payment performance history of PKA to date as evidence of the federal government’s commitment to honour the letters of support issued by the MOT in respect of the rated debt. At the same time, the SPEs’ non-compliance of the required six-month build-up of reserves prior to the redemption of upcoming debt maturities and the continuing controversy over the validity and enforceability of the letters contributes to uncertainty surrounding future government support. Any changes to the support assumptions may lead to a steep downgrade of the issue ratings.

Contacts:
Ahmad Tajuddin, +603-2082 2256/ tajuddin@marc.com.my;
Jason Kok Ching Wui, +603-2082 2258/ jason@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my

Four EU nations ban short-selling on banking stocks

France, Italy, Spain and Belgium have banned short-selling on the shares of banks and other financial companies.



It follows sharp gains and losses in bank stocks in recent days, especially in France, on fears about their exposure to eurozone government debt.

Societe Generale has been the worst affected by the volatility, being forced on Wednesday to deny that its financial stability was at risk.


SEE FULL ARTICLE FROM THE BBC BY CLICK ON THIS LINK

MARC AFFIRMS AA-ID RATING ON MAJU EXPRESSWAY'S RM550 MILLION ISLAMIC MTN PROGRAMME; OUTLOOK STABLE

Aug 11, 2011 -
MARC has affirmed its AA-ID rating on highway concessionaire Maju Expressway Sdn Bhd’s (MESB) RM550.0 million Islamic Medium Term Notes (IMTN) Issuance Programme under the Shariah principle of Musyarakah. The rating outlook is stable. Factors that continue to support the rating are improved toll revenue arising from satisfactory traffic growth and a favourable amortisation profile with no debt maturities until 2015. The rating is moderated by the potential demands on liquidity posed by highway expansion plans and the downside risk of lower-than-projected longer term traffic growth.



MESB is the owner and operator of the concession asset Maju Expressway (MEX), a 26km open-toll highway connecting the Kuala Lumpur city centre area to Putrajaya which serves five major townships south of Kuala Lumpur. Since MARC’s initial rating in 2010, MEX has continued to exhibit strong month-on-month growth in average daily traffic (ADT). Actual ADT of 78,962 vehicles/day exceeded projections by 8% in 2010. For the first six months of 2011, ADT grew 15.8% compared to the prior year corresponding period and will likely maintain its double-digit growth trajectory in the near term, aided by development and growth in its catchment areas. MESB’s revenue forecast for 2010 was exceeded by a modest margin of 7.5% at RM54.6 million. MESB has completed a feasibility study on the extension of the MEX from Putrajaya to the Kuala Lumpur International Airport (KLIA) and submitted its proposal to the government. The company also made payments totaling RM54.1 million in respect of preliminary expenses and refundable deposits on the extension. A decision by the government to undertake the extension is expected by end-2011.

The cash payments for the extension of the MEX contributed to the decline in its cash flow from operations to negative RM49.4 million (2009: +RM30.2 million). MARC understands that deposits amounting to RM49.15 million will be refunded in the event no agreement is concluded between the government and MESB with respect to the extension. While MESB’s debt repayment schedule (amortisation begins in 2015) accommodates early cash flow shortfalls against projections in initial years of the financing, this reduces the company’s cash buffer and increases MESB’s reliance on future traffic growth to meet its debt servicing requirements.

Despite the improved toll revenue, MESB recorded a pre-tax loss of RM3.3 million in 2010 (2009: pre-tax loss of RM42.4 million) as higher traffic volumes resulted in larger operations and maintenance costs as well as higher amortisation of its highway development expenditure. Additionally, the expiry of its defects liability period on December 31, 2009 also contributed to the higher maintenance costs. The operating losses have reduced MESB’s shareholders’ funds to negative RM0.4 million; however, based on the trust deed’s calculation which includes a government grant of RM976.7 million as part of shareholders’ equity, MESB remains in compliance with its gearing covenant with a debt-to-equity ratio of 0.55 times as at 2010 (2009: 0.34 times).
The stable outlook incorporates MARC’s expectations that MESB will not incur further significant non-budgeted cash outflow and will maintain enough liquidity to avoid further downward pressure on its rating.

Contacts:
Jason Kok, +603-2082 2258 / jason@marc.com.my;
Sandeep Bhattacharya, +603-2090 2247 / sandeep@marc.com.my.

RAM Ratings reaffirms National Bank of Abu Dhabi's AAA/P1 financial institution ratings with a stable outlook

Published on 10 August 2011
RAM Ratings has reaffirmed the respective long- and short-term financial institution ratings of National Bank of Abu Dhabi PJSC (NBAD or the Bank), at AAA and P1.



Concurrently, the AAA rating of the Bank’s up to RM3 billion Senior Unsecured Islamic/Conventional Medium-Term Notes (2010/2030) has also been reaffirmed. Both long-term ratings have a stable outlook. The ratings reflect the strong support from the Bank’s majority shareholder, i.e. the Government of Abu Dhabi (GoAD), its solid domestic market position and healthy credit fundamentals. NBAD, the second-largest bank in the United Arab Emirates (UAE), is 70.5%-owned by the GoAD.

RAM Ratings still considers NBAD’s asset quality to be satisfactory despite a rise in the Bank’s gross impaired loans (GILs) during the year, mainly because of its still-ailing domestic real-estate sector. The Bank’s GIL ratio increased from 1.3% as at end-December 2009 to 2.7% as at end-June 2011. We note that NBAD’s asset quality is much better than its counterparts’ given that the Bank has limited exposure to the beleaguered Dubai World and its related entities. We expect the Bank’s GIL ratio to peak at about 4% this year given the subdued UAE real-estate market. In terms of its funding profile, NBAD’s loans-to-deposits ratio of 103.9% as at end-June 2011 was higher than those of RAM Ratings’ universe of financial institutions. However, we believe that support will be forthcoming from the GoAD in the event of any liquidity crunch. On a more positive note, the Bank maintains a relatively liquid balance sheet, with a liquid-asset ratio of 43.3% as at end-June 2011.

In FY Dec 2010, NBAD chalked up a respectable pre-tax profit of AED3.8 billion despite hefty credit costs. We expect the Bank to record a marginal growth in its pre-tax profit in fiscal 2011. Its still-strong pre-provision profit-generating ability puts it in a better position to cushion elevated credit costs. Meanwhile, NBAD’s capitalisation level remained robust as at end-June 2011, with respective tier-1 and overall risk-weighted capital-adequacy ratios of about 15% and 21%.

Media contact
Shireen Ng
(603) 7628 1021
shireen@ram.com.my

The most defensive bank stocks on earth

(From Mizuho Securities Asia Ltd)
The most defensive bank stocks on earth
Top picks for panic conditions
Given the historic sell off across global markets in the past few days, investors have to be thinking either exit or ultra-defensive as far as banks stocks are concerned. Following is our view of the most defensive bank stocks on earth.
As a rule of thumb, we are looking for bank stocks that offer a solid 3.5% dividend yield, with no doubt about the bank’s ability to maintain the dividend, and large cap/high market share institutions with better than average profitability and capital strength.
Our list of favourites is understandably quite short. We think investors could consider the following names:
Fig 1  The five most defensive banks are all in Asia

			Dividend			Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
HSB	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2

Source: Bloomberg, Mizuho research
Skip the major global banks
The major global banks have not yet fully recovered from the Wall Street collapse of 4Q08 and the ensuing global recession in 2009 and are at the epicentre of current economic concerns. As a result, most of these banks are in need of balance sheet repair and are not in a position to pay big dividends, which is key for defensive investors.
We would be wary about looking at valuations out of context for these banks. PBV multiples are generally below 1.0x for the global banks, which we consider to be a distress signal.
The major European banks rank as least attractive at this point, despite bargain basement valuations. In banking geography can often be destiny. The Europeans naturally have the highest exposure to the troubled PIIGS markets of Portugal, Ireland, Italy, Greece, and Spain. We are witnessing a slow motion sovereign debt default in this region. It is way too early to call the bottom for European banks.
The top US banks have made some progress since the dark days of 4Q08, but the weak US economy continues to drag financial performance. The recent scare about the US government debt limit does not add to investor confidence for these names.
Fig 2  Global bank stocks are not in a defensive position at present

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
Santander	SAN SM	NR	5.5%	10.6%	9.20%	5.3
BNP Paribas	BNP FP	NR	5.0%	10.9%	9.20%	5.0
HSBC	5 HK / HSBA LN	NR	4.5%	9.5%	10.53%	4.6
Barclays	BARC LN	NR	2.1%	7.3%	10.80%	1.8
Deutsche	DBK GR	NR	2.1%	5.4%	8.70%	1.7
JPMorganChase	JPM US	NR	1.5%	12.3%	9.80%	1.0
Bank of America	BAC US	NR	0.4%	5.8%	8.60%	0.2
Citigroup	C US	NR	0.05%	6.6%	10.75%	0.0
UBS	UBS US	NR	-	17.2%	15.30%	-
RBS	RBS LN	NR	-	-1.5%	10.70%	-
Lloyds	LLOY LN	NR	-	-1.4%	10.20%	-

Source: Bloomberg, Mizuho research
China banks: More defensive than you might think
Despite market worries this summer about iffy loans to local government financing vehicles, we consider the Big 4 Chinese banks defensive stock plays. The combination of high dividend yields, high ROEs, and high Core Tier 1 capital strikes us as very appealing. Valuations may not be cheap compared to bombed out global bank stocks, but the H-shares are currently trading at 2.0x PBV, which is the all-time low.
Fears about a possible credit shock this year are overdone in our view, although we see a credit cycle downturn as inevitable. Provision costs will be on the upswing this year. Even so, we expect the H-share banks to report 23% earnings growth in 2011.
Dividend payouts are solid for the Chinese banks since earnings are not under pressure.
Fig 3  Big is beautiful and tends to be defensive in China

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
ICBC	1398 HK	BUY	4.3%	22.1%	9.97%	9.6
CCB	939 HK	BUY	3.6%	21.9%	10.40%	8.2
BOC	3988 HK	BUY	4.2%	18.2%	10.09%	7.7
ABC	1288 HK	BUY	3.5%	22.1%	9.75%	7.5
Less defensive
Bocom	3328 HK	HOLD	2.3%	20.2%	9.37%	4.4
Merchants	3968 HK	HOLD	2.4%	22.7%	8.04%	4.3
Citic	998 HK	HOLD	2.6%	19.3%	8.45%	4.2
Minsheng	1988 HK	SELL	2.1%	18.3%	8.08%	3.1

Source: Bloomberg, Mizuho research
Rest of Asia: Mighty Malaysia
The top dividend payers in the rest of Asia include major banks in Malaysia, Hong Kong, and Singapore. Maybank is the most defensive bank stock in the region with its 6.1% dividend yield and high leverage adjusted ROE. Hang Seng Bank comes in second place on the same basis. Five major banks in the region offer dividends yielding 3.5% or more.
High dividend payouts could be under threat over the medium term for some Asian banks, including Hang Seng Bank. Hang Seng’s CEO Margaret Leung commented recently that increased capital requirements could force the bank to review its dividend policy. We see Hang Seng Bank, Maybank, and Public Bank as traditional plays. This is an issue well worth monitoring.
Fig 4  Selected Asian banks

			Dividend		Core	Defensive
	Ticker	Rating	yield	ROE	Tier 1	Index
More defensive
Maybank	MAY MK	NR	6.1%	14.9%	11.64%	10.6
Hang Seng Bk	11 HK	NR	4.2%	22.3%	11.00%	10.3
Public Bank	PBK MK	NR	3.9%	25.8%	9.70%	9.9
UOB	UOB SP	NR	3.5%	13.2%	14.90%	6.8
BOCHK	2388 HK	NR	3.7%	13.6%	11.29%	5.6
Less defensive
CIMB	CIMB MK	NR	3.1%	16.3%	10.94%	5.5
SCB	SCB TB	NR	2.2%	21.0%	10.80%	4.9
OCBC	OCBC SP	NR	3.0%	10.5%	15.40%	4.9
DBS	DBS SP	NR	2.8%	11.0%	13.50%	4.1
BBL	BBL TB	NR	2.7%	11.8%	12.26%	3.9
Kbank	KBANK TB	NR	1.6%	17.9%	6.69%	2.0

Source: Bloomberg, Mizuho research