RAM Ratings has upgraded the ratings of the Tranche A3 and Tranche A4 Sukuk under Menara ABS Berhad’s RM1,000 million Sukuk Ijarah Programme (2008/2023), from a respective A1 and A2 to AA3.

Published on 06 May 2016

RAM Ratings has upgraded the ratings of the Tranche A3 and Tranche A4 Sukuk under Menara ABS Berhad’s RM1,000 million Sukuk Ijarah Programme (2008/2023), from a respective A1 and A2 to AA3. At the same time, we have reaffirmed the respective ratings of the Tranche A1, Tranche A2 and Tranche B Sukuk. Menara ABS is a trust-owned, special-purpose vehicle incorporated by Telekom Malaysia Berhad (TM) solely for the Sukuk Ijarah agreement involving Menara TM, Menara Celcom, TM Taman Desa and TM Cyberjaya (collectively, the Properties).

Sukuk Ijarah	Rating/ Outlook	Rating Action	Outstanding Amount (RM million)	LTV Ratio (%)	Stressed DSCR (times)
Tranche A
Tranche A1	AAA/Stable	Reaffirmed	240	36.57	2.83
Tranche A2	AA2/Stable	Reaffirmed	55	44.96	2.30
Tranche A3	AA3/Stable	Upgraded from A1/Stable	40	51.05	2.03
Tranche A4	AA3/Stable	Upgraded from A2/Stable	10	52.57	1.97
Tranche B
Tranche B1	AAA/Stable	Reaffirmed	Fully Redeemed	-	-
Tranche B2			40	-	-
Tranche B3			85	-	-
Tranche C	Unrated	-	500	-	-

The upgraded ratings of the Tranche A3 and A4 Sukuk reflect the recent revision of RAM’s stressed refinancing constant, from 10% to 8.5%, which has led to improved stressed debt service coverage ratios (DSCRs) that are commensurate with the AA3 ratings. We highlight that there is no change in our sustainable assumptions. Meanwhile, the reaffirmed ratings of the Tranche A1 and A2 Sukuk continues to reflect our opinion that the portfolio’s adjusted valuation of RM656.21 million remains in line with RAM’s view on its quality and cashflow-generating ability. We have also considered the minimal counterparty risk arising from TM’s role as the Master Lessee under the 15-year Master Ijarah Agreement. The rating of the Tranche B Sukuk, whereby principal redemption and profit payments are met by payments from TM’s lease with Menara ABS Berhad under the Ijarah agreement, continues to mirror TM’s credit profile, driven by its strategic business position as Malaysia’s national telecommunications provider.

During the reviewed period, the Properties’ net income increased 14.3% y-o-y to RM71.8 million, thanks to the significantly better performance of TM Convention Centre (TMCC) and supported by rental payments from TM-related tenants. Celcom Axiata Berhad has also signed a 3-year lease extension (until September 2018) at higher rentals, thereby providing more visibility on the transaction’s near-term sustainable cashflow. Nevertheless, we will only consider revising the ratings if market conditions in the office sector recover to levels that support the portfolio's asking rental rates, and if TMCC can sustain its improved net property income.

Meanwhile, the ratings are moderated by high tenant- and asset-concentration risks, particularly from the TM Group and Menara TM, which contributed a respective 62% and 75% of the Properties’ rental revenue in 2015. The tenant-concentration risk may increase when Celcom Axiata’s lease expires. We also opine that the portfolio may be subject to adverse selection by TM, and certain assets will only appeal to a limited tenant or investor base due to their highly specialised nature. Furthermore, TM does not intend to invest capital to refurbish TM Taman Desa and TM Cyberjaya in the immediate term because they are currently occupied by TM tenants. As such, they may become less competitive than newer properties in the vicinity.

Profit payments on the Tranche A Sukuk are covered by lease payments from TM while the principal redemption will be met via proceeds from either refinancing, repurchase by TM or disposal of the Properties in the open market. Meanwhile, the principal redemption and profit payments on the Tranche B Sukuk are met by lease payments from TM. During the reviewed period, TM had promptly settled its RM75.2 million of lease payments and redeemed the RM30 million Tranche B1 Sukuk.

Media contact
Chin Jin Han
(03) 7628 1168
Jinhan@ram.com.my