MARC DOWNGRADES RATING ON SPRINT'S RM510 MILLION BaIDS, AFFIRMS RM365 MILLION BG BONDS; OUTLOOK STABLE

Feb 10, 2012 -
MARC has lowered its rating on Sistem Penyuraian Trafik KL Barat Sdn Bhd's (SPRINT) RM510 million Al Bai Bithaman Ajil Islamic Debt Securities (BaIDS) to A+ID from AA-ID. The rating outlook is stable. Concurrently MARC has affirmed its AA-(bg) rating on SPRINT's RM365 million Bank Guaranteed Serial Fixed Rate Bonds (BG Bonds) with a stable outlook.

The rating and outlook of the BG Bonds reflect MARC's financial institution ratings on two of three banks participating in the consortium of bank guarantors for the BG Bonds, AmInvestment Bank Berhad and RHB Bank Berhad (public information basis), both of which are rated AA-/Stable. The rating on the BG Bonds reflects MARC's continued approach of rating the bonds at the same level as the lowest rated financial institution(s) participating in the consortium of bank guarantors.

The issuer, SPRINT, is the concession holder for the SPRINT highway, a 25.5 km open toll urban highway which serves the west of Kuala Lumpur. SPRINT is wholly-owned by SPRINT Holdings Sdn Bhd which, in turn, is owned by three listed entities, Gamuda Berhad (30%), Lingkaran Trans Kota Holdings Bhd (LITRAK) (50%) and Kumpulan Perangsang Selangor Bhd (20%).

The revision in the rating of the non-guaranteed BaIDS reflects the removal of rating uplift incorporated for shareholder support in the issue rating. The rating on the BaIDS had previously incorporated rating uplift from the stand-alone credit strength of SPRINT on the basis of undertakings by SPRINT Holdings and shareholders of SPRINT Holdings to subscribe to loan stocks and redeemable preference shares respectively, to be issued by SPRINT and SPRINT Holdings, the intent of which was to provide credit support for the BaIDS.

The tangible support provided by SPRINT's shareholders had enabled the toll road concessionaire to maintain fairly robust debt service coverage despite modest cash flow generation prior to the financial year ending March 31, 2010 (FY2010). In the absence of new explicit commitment from SPRINT's shareholders to provide further financial support following the fulfilment of the aforementioned investment obligations undertaken, MARC will not be incorporating the potential for further support into the rating on the BaIDS unless the rating agency is certain of forthcoming financial support.

The rating on the BaIDS incorporates revised traffic projections by independent traffic consultant Halcrow Consultants Sdn Bhd and weaker traffic growth prospects on the SPRINT highway, as well as the compensation payments received from the government in lieu of deferred toll rate hikes since 2008 for the highway's Damansara and Pantai links and 2010, in respect of Kiara Link. The rating also takes into account SPRINT's significantly improved operating cash flow generation in recent financial periods.

The SPRINT highway has seen improved traffic volumes in recent years since the opening of Duta-Ulu Kelang Expressway (DUKE) in 2009. Traffic volume on the Kerinchi Link and Penchala Link grew 9.9% and 21.3% respectively for the 2010 calendar year. Consequently, SPRINT's revenue rose by 29.0% to RM156.5 million for FY2011. However, higher amortisation of SPRINT's highway development expenditure resulted in a larger pre-tax loss of RM49.2 million in FY2011. On a positive note, SPRINT generated cash flow from operations of RM110.5 million in FY2011, up from RM107.8 million for the prior year, and has a cash balance of RM115.0 million as at end-FY2011.

According to the aforementioned May 2011 traffic study which incorporates downward revision of projected traffic along the three links of between 12% to 32% from 2012 through 2035, possible congestion along the Kerinchi Link could limit traffic growth on the highway. The financial impact of the revised forecast will be a reduction of SPRINT's minimum and average projected debt service coverage ratio (DSCR) to 2.13 times and 3.21 times respectively, from 2.24 times and 3.62 times respectively based on the previous traffic forecast. Additionally, should toll hikes not occur as scheduled and if SPRINT were to receive cash compensation payments, half of which is paid in the following financial year, its minimum and average projected DSCR would fall to 1.93 times and 2.87 times respectively. The rating agency notes that SPRINT’s cash flow is more sensitive to delays in the receipt of compensation payments from the government than negative yearly variances of up to 15% from projected traffic volume for the highway’s Kerinchi and Penchala links.

The prompt payment of compensation from the government is fundamental to SPRINT’s maintenance of its liquidity and cash flow metrics at levels commensurate with its current rating, particularly in view of its forthcoming debt obligations of RM131.2 million and RM143.6 million in FY2012 and FY2013 respectively.

The stable outlook assumes that the SPRINT highway will achieve traffic levels in line with the revised traffic forecast and that SPRINT's cash flow generation and liquidity will not detract significantly from anticipated levels.

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

RAM Ratings reaffirms Royal Selangor's rating, maintains negative outlook

Published on 13 February 2012
RAM Ratings has reaffirmed the A3 rating of Royal Selangor International Sdn Bhd’s (Royal Selangor or the Group) RM30 million Redeemable Unsecured Bonds (2001/2014) and maintained the negative outlook on the Group’s long-term rating. Royal Selangor and its subsidiaries are involved in the manufacturing and marketing of pewter, as well as marketing of jewellery products.

The rating is supported by Royal Selangor’s well-established brand, manageable balance sheet and moderate cashflow-protection measures. The ratings are, however, moderated by its susceptibility to cyclical economic change amidst a competitive and fragmented industry, its longer operating cash cycle days, continued losses in Selberan Jewellery Sdn Bhd and its exposure to volatile tin prices.

Royal Selangor’s overall operating performance improved in FYE 30 June 2011 (FY June 2011). The Group’s revenue grew 7.24% on the back of half-year contributions from its new Straits Quay tourist centre and its new flagship store at Pavilion which opened in the second half of the fiscal year as well as increased sales of higher-value items. Meanwhile, the Group’s profit margins also improved, aided by effective tin hedging policy and above-mentioned increased sales of higher-priced products. Despite the better operating performance, funds from operation debt cover (FFODC) slipped to 0.14 times (end-FY June 2010: 0.22 times) as more debt were assumed during the year amid its store expansion and corresponding increase in working capital needs. The higher debt levels lifted Royal Selangor’s gearing ratio to 0.73 times as at FY June 2011 (end-FY June 2010: 0.66 times) but is still within our expectations.

“Looking ahead, Royal Selangor’s gearing ratio is envisaged to stay manageable at below 0.8 times in the next 2 fiscal years, as its capital expenditure plans are estimated to be less hefty than those incurred in FY June 2011. Full-year contribution from the Group’s new outlets opened in 2H FY June 2011 as well as full-year effect of selling price increase implemented in April 2011 are expected to keep its FFODC at around 0.15 times in the near term. That said, the Group’s FFODC may dip below 0.15 times should Royal Selangor’s product demand be affected by the weaker economic environment,” explains Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

Meanwhile, the negative outlook is premised on fresh concerns over the softer economic conditions and the resultant impact on consumer and corporate spending on discretionary pewter giftware. The impact of higher tin price contracted on margins and the lengthening of operating cash cycle on higher working capital needs may also pose downside risk to Royal Selangor’s performance.

The rating may revert to stable if the Group is able to demonstrate resiliency amidst the challenging economic conditions as well as preserve its balance sheet strength and cashflow-protection measures. Conversely, the rating could be downgraded if Royal Selangor's business and financial profiles deteriorate.

Media contact
Low Pui San
(603) 7628 1051
puisan@ram.com.my

MARC AFFIRMS ITS AAAIS RATING ON AMAN SUKUK BERHAD’S RM10.0 BILLION ISLAMIC MEDIUM TERM NOTES PROGRAMME

Feb 3, 2012 -

MARC has affirmed its rating of AAAIS on special purpose vehicle Aman Sukuk Berhad’s (Aman) Islamic Medium Term Notes (IMTN) programme of up to RM10.0 billion with a stable outlook. The rating affirmation reflects the credit of the Government of Malaysia (GoM) as the single obligor and sublessee which will make contractual sublease rental payments under irrevocable sublease agreements between the GoM and Pembinaan BLT Sdn Bhd (PBLT) in respect of projects for the Royal Malaysia Police or Polis DiRaja Malaysia (PDRM). The repayment profile of each series of IMTN issued is structured to match defined sublease rental payments from the GoM to ensure full and timely servicing and repayment of the notes.

PBLT is a government-owned entity that was set-up to undertake the development of 74 projects comprising facilities and housing quarters for PDRM under the build-lease-transfer model in accordance with the principles of private finance initiatives (PFI). Aman was incorporated as a wholly-owned subsidiary of PBLT to facilitate the funding of the development through the IMTN issuances.

Under the transaction structure of the programme, PBLT will assign all sublease rental collections from the GoM for projects or sections of projects in the development to Aman. As the IMTNs can only be drawn down for projects or sections of projects that have been issued with certificates of completion and compliance, noteholders are insulated from construction risks. Each sublease payment represents an independent and irrevocable obligation by the GoM and is channelled directly into designated accounts without passing through PBLT’s bank accounts which eliminates comingling risk. MARC draws comfort from the fact that the sublease rental amounts under each IMTN series is adequate to cover principal and profit payments due during the tenures of the issues.

As at end-December 2011, PBLT has competed 41 projects and 20 sectional completions. Part of these completions have been assigned to Aman to issue IMTNs totalling RM2.265 billion as of date. MARC observes that PBLT has completed 55% of its mandated 74 projects as of end-2011 with full completion expected by 2015. Aman has met its first profit payment to sukuk holders in 2011 and is on track to meet its profit payments due in 2012.

The stable outlook reflects MARC's expectation of a supportive funding environment for the GoM and timely receipt of funding allocations going forward.

Contacts:
Ahmad Gazzara Czillich, +603-2082 2259/ gazzara@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .

MARC DOWNGRADES SUKUK RATINGS ON AMPLE ZONE BERHAD TO D

Feb 3, 2012 -
MARC has downgraded its ratings on Ample Zone Berhad’s (Ample Zone) RM9.65 million Class B Sukuk Ijarah (sukuk) and RM75 million Class C sukuk to D from BB+IS and B-IS respectively. The downgrades reflect missed principal payments of RM84.65 million on January 27, 2012. MARC has received confirmation from the facility agent and trustee that no payments were made on the date. Ample Zone had earlier proposed to defer the principal repayments for three years to January 27, 2015. Sukukholders have not given their consent to the proposal yet and no event of default has been declared as of the date of this press announcement. Ample Zone is the special purpose vehicle that was established to issue the sukuk backed by four real estate properties.

Following the downgrades, MARC will accordingly cease to provide analytical coverage on Ample Zone.

Contacts:
Ruben Khoo Sheng Luen, +603-2082 2265/ rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.

MARC DOWNGRADES RATING ON PERWAJA STEEL SDN BHD'S RM400.0 MILLION MMTN PROGRAMME to A-ID; OUTLOOK NEGATIVE

Feb 3, 2012 -
MARC has lowered its rating on Perwaja Steel Sdn Bhd’s (Perwaja) RM400.0 million Murabahah Medium Term Notes (MMTN) programme from AID to A-ID. The outlook on the rating is negative. The rating action, which affects RM160 million of outstanding MMTNs under the programme, is premised on the prolonged decline in the steelmaker’s operating performance and the rating agency’s expectation of deterioration in its leverage and cash flow coverage credit metrics as a result of incremental debt to finance capital expenditure on an iron ore concentration and pelletizing plant.

While Perwaja’s strategic initiative to integrate backwards into iron ore processing would likely contribute to better longer-term performance, MARC believes that the uncertain industry conditions and ongoing pressure on Perwaja’s profitability will make it difficult for the steelmaker to improve its credit measures to a level commensurate with its previously assigned rating within the next 12 to 24 months. This view is reflected in the negative outlook that MARC is maintaining on the rating.

The rating also reflects Perwaja’s vulnerability to decreases in upstream steel consumption and lower steel prices, its domestic market revenue concentration and its sensitivity to raw material price fluctuations, as evidenced by its lacklustre sales and reported losses for two consecutive years and the nine month period ending September 2011 (9MFY2011). MARC also acknowledges the financial support from Perwaja’s ultimate holding company Kinsteel Berhad (Kinsteel) which, together with reduced working capital requirements at the steelmaker, have helped to limit the deterioration in Perwaja’s financial profile and allowed the company to exhibit improved cash flow coverage measures in a challenging operating environment.

Perwaja is engaged in the production of direct reduced iron (DRI), a steelmaking feedstock, and semi-finished long products such as billets, beam-blanks and blooms. In recent times, Perwaja’s profitability has been adversely affected by the negative impact of an incomplete pass-through of raw material cost increases to steel product prices as well as lower demand for billets and DRI. For 9MFY2011, average iron ore and scrap prices have risen by 18.2% (2011: USD182/MT vs 2010: USD154/MT) and 20.5% (2011: USD493/MT vs 2010: USD409/MT) respectively while selling prices for both DRI and billets have only increased by 11.9% and 11.5% (DRI - 2011: USD469/MT vs 2010: USD419/MT) (Billets - 2011: USD652/MT vs 2010: USD585/MT) respectively. The pressure on margins was further exacerbated by increases in electricity and natural gas costs, causing Perwaja to report pre-tax losses of RM54.0 million for 9MFY2011. Prior to that, the steelmaker also posted pre-tax losses of RM67.8 million in FY2010 and RM140.4 million in FY2009.

Perwaja expects to commission the first phase of the RM230.0 million iron ore concentration and pelletising plant in 2012. The plants, which will have a total combined annual production capacity of 2.4 million metric tonnes when both phases are completed, are expected to substantially meet the steelmaker’s internal requirement of iron ore pellets. Total project costs will be mostly funded by new borrowings. MARC understands that Perwaja is also proposing a joint venture between the company and the Terengganu state government to mine iron ore with a view to obtain a regular supply of iron ore. Perwaja is banking on the successful implementation of these strategic initiatives to reduce its dependency on imported iron ore and exposure to volatile iron ore prices, and to realise production cost savings. In MARC’s view, these strategic initiatives are subject to moderate execution risk.

Perwaja has recorded losses for the two consecutive years and the 9MFY2011. Its gearing, as measured by its debt to equity (D/E) ratio, continues to be elevated on the back of these losses notwithstanding a slight improvement in total debt levels and equity base following capital injections. The steelmaker has been generating positive cash flow from operations (CFO) since FY2009 as a result of lower working capital needs in a weaker revenue environment. MARC notes positively the fund raising exercise by immediate holding company Perwaja Holdings Berhad (PHB) to raise RM280.0 million through the issuance of redeemable convertible unsecured loan stocks (RCULS) to Kinsteel for the working capital needs of Perwaja group. As of January 4, 2011, Kinsteel has made a RM70 million RCULS subscription payment to PHB, the balance of RM210.0 million to be paid by early February 2012. The RCULS issuance will address MARC’s earlier concern over Perwaja’s heavy dependence on short-term trade financing to fund its working capital needs.

Against the uncertain outlook in the domestic steel industry and slower-than-expected rollout of infrastructure projects in the country as well as continuing cost pressures, a return to profitability is not expected in the near term. Meanwhile, Perwaja’s debt-funded investment programme will likely make the company increasingly free cash flow negative, and place the steelmaker at increased risk of deterioration in its financial profile. MARC believes that Kinsteel’s ability to provide further financial support to PHB and Perwaja beyond the full subscription of its allotted RCULS in the next 12 to 24 months is limited.

The rating outlook could revert to stable if Perwaja’s operating performance improves over the coming quarters, and the company continues to retain an appropriate liquidity profile in addition to the ability to address its refinancing needs reasonably in advance.

Contacts:
Ahmad Gazzara Czillich, +603-2082 2269/ gazzara@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

MARC AFFIRMS MARC-1/AA- RATINGS ON IJM CORPORATION BERHAD'S RM1.0 BILLION CP/MTN PROGRAMME

Feb 3, 2012 -
MARC has affirmed its MARC-1/AA- ratings on IJM Corporation Berhad’s (IJM) RM1.0 billion Commercial Paper/Medium Term Notes Programme (CP/MTN) with a stable outlook. The ratings action incorporates the satisfactory operating performance of its plantation, property and infrastructure segments, as well as the holding company’s broadly adequate liquidity and favourable financial flexibility. The higher year-on-year pre-tax profits posted by the three segments in the financial year ended March 31, 2011 (FY2011) have helped to offset the losses of its construction segment and weaker performance at its industrial segment. MARC notes that there has been an easing of the pressure on the holding company’s cash flow and liquidity in FY2011 on account of higher dividends received from subsidiaries, the repayment of advances by subsidiaries and lower investment outflows.

Constraining the ratings is the cyclicality of its construction and property development businesses, the heavy capital spending required for its Indonesia-based oil palm plantation operations, as well as the drag on profitability exerted by IJM’s construction and toll road operations in India.

IJM is the holding company of IJM group which has core activities in construction, property development, manufacturing and quarrying, infrastructure concessions and plantations. IJM which continues to maintain a strong competitive position in the domestic construction sector has shown good order book replenishment in recent quarters with a RM3.75 billion outstanding order book as of end-June, 2011, of which domestic orders accounted for RM3.04 billion or 81% (March 2010: RM3.62 billion and RM2.15 billion respectively). MARC notes the improved outlook for revenue and profitability for the construction segment as well as its pre-tax profit of RM21.6 million for the six months to September 30, 2011 (1HFY2012) after posting losses of RM79.2 million for FY2011. The weak performance in FY2011 was mainly due to the provisions made against contractual claims, recovery of receivables and project losses in some of the group’s overseas projects.

The increasing earnings contribution from IJM’s property segment and the near-term earnings visibility that is provided by contracted or unbilled sales of IJM Land Berhad (IJM Land) continue to provide support for the group’s financial profile. IJM Land’s strong brand name, long track record of operation, land bank quality and moderate project concentration continue to afford relative resilience to pressures in the operating environment. Take-up rates for IJM Land’s recent launches in the high-end segment have been weak, nonetheless, this is likely to be somewhat mitigated by better demand for the group’s medium cost residential property offerings. IJM’s property segment registered a significantly higher pre-tax profit of RM289.7 million in FY2011 (FY2010: RM171.9 million) owing in part to a one-off RM63 million gain from the disposal of its investment property, Aeon Bandaraya Melaka.

IJM’s plantation operations are undertaken by IJM Plantations Berhad (IJMP) which benefited from higher crude palm oil (CPO) prices in FY2011 which averaged RM2,760 per tonne (FY2010: RM2,246). The favourable maturity profile of its Malaysian plantations suggests that production should remain broadly stable and sustain operating cash flow generation. At the same time, MARC expects free cash flow generation to be constrained by the high levels of plantation-related capital expenditure for IJMP’s Indonesian plantations. IJMP has incurred a total of RM355.0 million on plantation development in respect of its Indonesian plantation operations up to end-March 2011; another RM500 million of plantation-related capital spending is budgeted for the next two years. The expansion will be partly funded by borrowings to be taken up at the subsidiary level. No meaningful revenue is expected from IJMP’s Indonesian plantation operations in the near term given that mature crops occupy only 563 ha of the total cultivated area of 13,606 ha (FY2010: 5,306 ha).

The group’s infrastructure segment was the third largest contributor of group earnings in FY2011, after property and plantations. Of the group’s three domestic toll road concessions, Besraya Highway and New Pantai Expressway (NPE) registered improved performance while Kajang-Seremban Highway (Lekas) registered losses due to weaker-than-expected traffic growth. The group holds joint venture interests of 35% to 50% in three Indian tollways and holds 100% interest in two tollways. The tollways are in various stages of operation. Two of the five tollways are still in ramp-up phase, having commenced full tolling only in mid-FY2010, which is reflected in part in the tollway portfolio’s adjusted pre-tax losses of RM8.6 million after adjusting for net foreign exchange gains. MARC expects the earnings contribution of IJM’s Indian tollway investments to remain muted in the near term and notes that the group has entered into share purchase agreements to acquire additional stakes in two of the remaining three older tollways in the group’s portfolio of Indian tollway investments. On a positive note, the group’s infrastructure concession investments in domestic ports, power plant in Andra Pradesh, India, and water treatment plant in Vietnam continue to provide positive recurring income.

At the operating holding company level, significantly higher dividend income of RM164.5 million was enough to offset the decline in construction revenue to RM112.8 million in FY2011. As at March 31, 2011, there was a slight increase in IJM’s gearing at company level; total borrowings were higher at RM1,078.6 million, translating into a higher debt-to-equity ratio of 0.27 times (FY2010: 0.25 times).

Compared to FY2010’s negative cash flow from investing activities of RM443.5 million, however, IJM recorded positive cash flow from investing activities of RM127.1 million as a result of net repayment of advances from subsidiaries and higher dividend receipts. MARC notes IJM’s debt maturities of RM100 million and RM400 in FY2013 and FY2014 respectively, in relation to which the holding company’s cash and cash equivalents of RM147.2 million and good access to bank and bond markets provide assurance of its ability to meet its maturing debt obligations.

The stable outlook incorporates MARC’s expectation that IJM group will exhibit broadly stable operating performance and that sound liquidity and adequate cash flow coverage measures will be maintained at the holding company level in the next 12 to 18 months. Downward rating pressure could emerge if IJM were to make large debt-funded investments or provide funding support for its underperforming subsidiaries or associates that could adversely affect its financial profile.

Contacts:
Taufiq Kamal, +603-2082 2251/ taufiq@marc.com.my;
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

RAM Ratings reaffirms AmIslamic's AA3/P1 ratings

The 1-notch rating differential between AmIslamic’s AA3 long-term financial institution rating and the A1 rating of its Subordinated Sukuk reflects the subordination of the debt facility to its senior unsecured obligations.
AmIslamic’s financial institution ratings mirror the AA3/Stable/P1 ratings of AmBank (M) Berhad (AmBank), the core entity within the AMMB Holdings Berhad (AMMB or the Group) universal-banking group. As the Islamic banking arm of the Group, the Bank leverages on AmBank’s risk-management systems, back-room operations and common infrastructure, in addition to riding on its branch network and distribution channels. Funding and capitalisation are managed at group level and support is expected to be forthcoming from AmBank, should the need arise.

Together, AmIslamic and AmBank have a well-established franchise in vehicle financing as Malaysia’s third-largest automobile financier. The Bank’s strategies are closely aligned with those of AmBank. In line with AmBank’s focus on portfolio diversification, AmIslamic has placed greater emphasis on the business and corporate segments, which are viewed to yield better returns given the greater cross-selling opportunities. The Bank’s proportion of vehicle financing declined to 46.7% as at end-September 2011 (end-March 2010: 52.9%), albeit still its largest financing component.

AmIslamic’s asset quality is still deemed sound despite having been affected by regulatory structural changes in the personal-financing space in 2010. Personal financing formed 14% of the Bank’s gross financing as at end-September 2011. Although higher financing impairment charges arising from this portfolio had dragged down AmIslamic’s profit performance in FYE 31 March 2011 (FY Mar 2011), this moderated in 1H FY Mar 2012. Meanwhile, AmIslamic’s capitalisation is deemed sufficient, with respective tier-1 and overall risk-weighted capital-adequacy ratios of 8.2% and 14.3% as at end-September 2011.

Media contact
Lim Yu Cheng
(603) 7628 1188
yucheng@ram.com.my

MARC AFFIRMS ITS RATINGS ON TESCO STORES (MALAYSIA) SDN BHD'S RM3.5 BILLION DEBT PROGRAMME

MARC has affirmed Tesco Stores (Malaysia) Sdn Bhd's (Tesco Malaysia) RM3.5 billion Conventional Commercial Papers/Medium Term Notes (CP/MTN) Facility and Islamic Commercial Papers/Medium Term Notes (ICP/IMTN) Facility at MARC-1(cg)/AAA(cg) and MARC-1ID(cg)/AAAID(cg) respectively. The ratings carry a stable outlook. The affirmed ratings and outlook are premised on the corporate guarantee provided by Tesco Malaysia's parent company, Tesco plc (Tesco) for the rated facilities. Tesco carries a public information rating of AAA/stable from MARC based on the retailer's strong business and financial profile. The retailer's earnings profile continues to be characterised by fairly steady operating margins, a good measure of resilience to economic cycles and improving geographic diversification in terms of earnings.

MARC notes that in tandem with its parent Tesco's business strategy, Tesco Malaysia continues to expand its retail network, increasing its number of stores to currently 45 as at end of December 2011 (FY2012) from 38 stores in 2010 (FY2011). Correspondingly, total retailing space rose to 3.6 million sq ft from 3.3 million sq ft in FY2012. The rapid expansion of retail space has enabled Tesco Malaysia to benefit from scale economies and maintain its leading market position in the domestic grocery retailing industry with 9.6% share as of July, 2011 (June 2011: 9.3%). MARC believes that Tesco Malaysia's near- to medium-term business emphasises cost efficiency, the closure of underperforming stores and new store openings to benefit from increasing returns to scale. Nonetheless, MARC notes that the rapid expansion of its store network continues to be funded by high debt levels, resulting in further weakening in the company's credit metrics.

For financial year ending February 28, 2011 (FY2011), Tesco Malaysia registered a 21.5% decline in pre-tax profit to RM60.2 million from RM76.7 million in FY2010, despite a 9.3% and 13.5% year-on-year increase in revenue and operating profit, due mainly to a significant rise in financial charges. In FY2011, borrowings rose by RM800 million, of which RM640 million was obtained from Tesco Stores Limited, Tesco's principal trading subsidiary, to meet the repayment of RM400.0 million under its MTN facility due this year. With that redemption, Tesco Malaysia currently has a total of RM585.0 million outstanding MTNs with maturities amounting to RM410.0 million, RM65.0 million and RM110.0 million in 2012, 2013 and 2014 respectively. Its debt-to-equity ratio (DE) for FY2011 remains elevated at 20.5 times (FY2010: 25.5 times), moderated only by a greater percentage increase in shareholders' equity compared to total debt. Despite Tesco Malaysia's positive cash flow from operations (CFO), its free cash flow remains negative which would imply Tesco Malaysia's continued reliance on parent or related-company funding to meet its forthcoming maturities.

For parent Tesco, key profitability measures as assessed by MARC, improved in FY2011. Tesco's consolidated revenue rose by 7.1% to £60.9 billion in FY2011, on the back of strong contributions from UK and South Korean operations which registered increases of 4.0% and 19.3% to £40.1 billion and £5.0 billion respectively. CFO, however, recorded a decrease of £0.8 billion in FY2011 compared to FY2010 on the back of higher inventory levels at year end. MARC notes that the group's gearing level as measured by its DE ratio continue to improve since FY2009, falling to 0.67 times as at end-FY2011 on the back of annual net debt repayment of £2.0 billion. Going forward, while the strong operating performance of its Asian operations has somewhat compensated for the weaker retail environment in much of Europe and the US, Tesco group is likely to face challenges in sustaining its growth momentum into FY2012/13. The group continues to record losses in the US due to a combination of heavy capital investment in distribution channels and insufficient scale of operations. Nonetheless, Tesco expects the US operations to breakeven in FY2012/13 with additional store openings. The rating agency expects Tesco's financial metrics to remain broadly stable, based on recent trends in its gearing level and sustained cash flow coverage measures, although the rating agency's analysis of the holding company's contingent liabilities - with respect to parent-guaranteed subsidiary debt - is constrained by its modest financial statement disclosures of the same.

The stable rating outlook also reflects MARC's expectation that support would be forthcoming from Tesco in respect of Tesco Malaysia's forthcoming note maturities as witnessed earlier for the subsidiary's FY2011 note maturities.

Contacts: Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my; Ahmad Gazzara Czillich, +603-2082 2259/ gazzara@marc.com.my.

MARC DOWNGRADES RATINGS OF SUPER SENIOR B, SENIOR, MEZZANINE AND SUBORDINATED CLO BONDS ISSUED BY PRIMA UNO BERHAD

Jan 31, 2012 -

MARC has downgraded its rating on Prima Uno Berhad’s (Prima Uno) RM335 million Super Senior B primary collateralised loan obligation (CLO) bonds to D from A-. Furthermore, the C ratings on the remaining classes of RM190 million Senior, RM40 million Mezzanine and RM95 million Subordinated CLO bonds have been downgraded to D. At the same time, MARC has removed its AAA rating for the RM290 million Super Senior A CLO bonds following early redemption of its outstanding amounts on November 25, 2011. Prima Uno is the special purpose company that was established to issue the CLO bonds backed by a portfolio of newly originated unsecured loans.

The downgrades for the respective classes reflect Prima Uno’s failure to make full payment of outstanding principal on their maturity date of January 26, 2012. MARC received confirmation from the facility agent that RM253.74 million of Super Senior B bonds were redeemed, representing a partial redemption of 75.7% of its outstanding principal amount. The facility agent also confirmed that there were no principal redemptions for the Senior, Mezzanine and Subordinated bonds on their maturity date.

As of the date of this press release, only 8 of the 33 obligors comprising the loan pool have repaid their outstanding principal in full while two obligors made partial principal repayment. There have been no recoveries to date in respect of the earlier defaulted loans.

Following the downgrades, MARC will no longer conduct any rating surveillance on the CLO bonds’ ratings.

Contacts:
Ruben Khoo, +603-2082 2265/ rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.

Indonesia: Surge in electronics (by OXFORD BUSINESS GROUP)

See http://www.oxfordbusinessgroup.com/: Rising demand is expected to have seen consumer electronics sales in Indonesia reach IR28trn ($3.1bn) in 2011, according to the country's producers association. While the figure underlines healthy growth in the sector, industry leaders say improved incentives and better infrastructure could lead to faster progress.

MARC AFFIRMS ITS B RATING ON DUTALAND BERHAD’S OUTSTANDING REDEEMABLE UNSECURED LOAN STOCKS

Jan 27, 2012 -

MARC has affirmed its rating on DutaLand Berhad’s (DutaLand) outstanding RM20,649,024 Redeemable Unsecured Loan Stocks (RULS) at B with a stable outlook. The rating action incorporates DutaLand’s improving operating performance, underpinned by a higher contribution from its plantation division that has offset weaker earnings from its property development activities, and its reliance on asset disposals to generate liquidity to meet its significant financial commitments.

DutaLand’s major property project, the 73-acre Kenny Heights Development, which is located in the Sri Hartamas vicinity in Kuala Lumpur and jointly undertaken with a related company, Olympia Industries Berhad, has seen slower-than-expected progress due partly to liquidity constraints. As of date, only one project consisting of 49 units of 4-storey villas with a gross development value of RM216.0 million was completed and handed over in April 2011. The first phase of its subsequent project, comprising two high-end condominium towers, has been delayed from an initial launch date in 1Q2011. MARC understands that the company has sold only 28 units of 168 units in the first tower through a soft launch, translating to a take-up rate of about 17% as of date. MARC observes that weakening market sentiment for the high-end residential segment in the Klang Valley could pose near-term challenges for DutaLand’s property development division.

MARC notes that DutaLand had planned to sell its sole plantation asset consisting of 11,978 hectares of oil palm plantation in Sabah to an IOI Corporation Bhd sub-subsidiary for RM830.0 million. However, the effort to significantly boost its liquidity position had failed following a mutual cancellation of the sales-and-purchase agreement in November 2011. Meanwhile, DutaLand continues to depend heavily on its plantation division to generate meaningful earnings. For financial year ended June 30, 2011 (FY2011), the plantation division recorded a sharp increase of 80% in revenue to RM56.0 million (FY2010: RM31.1 million) and a threefold increase in operating profit to RM27.6 million (FY2010: RM9.0 million) due to improved prices for fresh fruit bunches (FFB) and an increase in the production output of FFB to 88,139 metric tonnes (MT) (FY2010: 70,840 MT). Nonetheless, MARC notes the underperformance of its oil palm plantation relative to its peers: DutaLand’s average FFB yield of 10.59 tonnes/hectare was much lower than the Sabah state average of 20.90 tonnes/hectare and the national average of 18.65 tonnes/hectare.

Notwithstanding the plantation division’s performance, DutaLand registered lower revenue of RM115.5 million in FY2011 (FY2010: RM121.2 million) due mainly to lower contribution from property development activities which fell to RM59.4 million from RM88.2 million in the preceding fiscal year. The group registered a pre-tax profit of RM3.5 million, which is an improvement over FY2010’s pre-tax loss of RM9.5 million (excluding a one-off gain of RM26.1 million). Cash flow from operations has also shown a significant improvement to RM101.4 million (FY2010: RM10.1 million) mainly attributed to higher receivables collection. The group’s debt-to-equity ratio stood lower at 0.17 times as at FY2011 (FY2010: 0.26 times).

MARC notes that DutaLand repaid and cancelled RM82.0 million of financial instruments, which includes RM5.6 million of RULS in FY2011. The next scheduled redemption for the RULS of RM5.6 million is due in April 2012, with a final redemption of RM15.0 million in April 2013. With its consolidated liquidity position remaining minimal at RM12.5 million (FY2011: RM11.6 million) in relation to short-term obligations of RM69.8 million as of 1QFY2012, MARC expects DutaLand to accelerate asset disposals to support the group’s ability to fully meet debt repayments.

Contacts:
Thian Chow Di, +603-2082 2280/ chowdi@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .

MARC DOWNGRADES RATING OF OLYMPIA INDUSTRIES BERHAD’S OUTSTANDING RM49,733,635 NOMINAL VALUE REDEEMABLE UNSECURED LOAN STOCKS TO B+ FROM BB-

Jan 27, 2012 -

MARC has downgraded the rating of Olympia Industries Berhad’s (Olympia) outstanding RM49,733,635 nominal value Redeemable Unsecured Loan Stocks (RULS) to B+ from BB- and concurrently revised the rating outlook to stable from negative. The rating action reflects Olympia’s continued weak financial performance, in particular its limited cash flow generation ability arising from its weak business profile and its dependence on asset disposals to meet its financial obligations. Olympia has a short-term debt of RM81.3 million including an upcoming redemption of RM10.7 million RULS in April 2012, while its liquidity position as reflected by its cash and cash equivalents stood at RM31.9 million as at September 30, 2011.

MARC notes that the slower-than-expected progress of the Kenny Heights Development (KHD) project on a 73-acre site in Kuala Lumpur has weighed on its financial performance. The KHD project, which consists of high-end residential projects and undertaken with a related company, DutaLand Berhad, was expected to provide a major boost to earnings. However, as of date, only one project, consisting of 49 units of four-storey villas with a gross development value of RM216.0 million, was completed and handed over in April 2011, while the first phase of its next project comprising two high-end condominium towers has been delayed from an initial launch date in 1Q2011. MARC notes that a soft launch of one tower of 168 units has only registered a 17% take-up rate, reflecting the weakening market sentiments for the high-end residential segment in the Klang Valley. MARC remains concerned on Olympia’s ability to fund the development given its weak liquidity position and limited financial flexibility.

Nonetheless, Olympia’s revenue continues to be supported by somewhat stable earnings from its gaming division and from rental proceeds from its Menara Olympia building. Gaming operations, which are carried out solely in Sabah, have come under increasing competitive pressures, registering a 4% decline in revenue to RM152.0 million for financial year ending June 30, 2011 (FY2011) (FY2010: RM158.2 million). However, operating profit was higher at RM6.2 million as compared to the RM0.2 million in FY2010 due mainly to a one-off restoration cost incurred in 2010. Olympia’s investment property, the 34-storey Menara Olympia with total lettable area of 457,521 sq ft, registered a lower occupancy rate of 74% in FY2011 (FY2010: 78%), and as a result, rental income declined to RM18.9 million (FY2010: RM19.4 million). MARC notes that the lower occupancy has somewhat been offset by an increase in average rental rates to RM4.80 psf from RM4.30 psf. The group’s other businesses, namely financial services and travel, managed to turnaround in FY2011, registering a modest operating profit of RM3.5 million (FY2010: -RM8.4 million) and RM0.6 million (FY2010: -RM0.1 million) respectively.

For FY2011, Olympia’s improved pre-tax profit of RM9.1 million (FY2010: -RM5.1 million) after two consecutive years of pre-tax losses was mainly due to lower fair value losses from disposal of marketable securities as compared to previous years. However, for the first quarter ended September 2011 (1QFY2012), MARC notes that the group suffered a sharp pre-tax loss of RM32.1 million (1QFY2011:-RM1.5 million) arising from fair value losses incurred on disposal of marketable securities.

MARC notes that Olympia’s liquidity position in FY2011 was largely supported by cash inflows generated from the disposal of marketable securities and land parcels which amounted to RM138.9 million to enable it to meet its financial obligations of RM85.1 million. Given the group’s limited cash flow generating ability, it would need to depend on asset sales to generate liquidity. Among its major assets is Menara Olympia which has a carrying amount of RM228.1 million as at September 5, 2011 and is secured against debts amounting to RM157.1 million, though MARC notes an earlier sale agreement for the building had fallen through.

The stable outlook incorporates MARC’s expectations that Olympia will manage timely disposal of assets to meet its future debt obligations.

Contacts:
Darrell Lim, +603-2082 2261/ darrell@marc.com.my ;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my .

MARC AFFIRMS AAAID/MARC-1ID AND AAAIS RATINGS ON PUTRAJAYA HOLDINGS SDN BHD'S RM8.97 BILLION ISLAMIC DEBT FACILITIES AND PROGRAMMES

Jan 26, 2012 -
MARC has affirmed its AAAID /MARC-1ID and AAAIS ratings on Putrajaya Holdings Sdn Bhd’s (PJH) Islamic debt issuances as follows:-
• RM570 million Bai Bithaman Ajil (BBA) Bonds Issuance Facility (due 2013)
• RM850 million BBA Bonds Issuance Facility (due 2013)
• RM850 million BBA Serial Bonds Issuance Facility (due 2015)
• RM1.5 billion Murabahah Notes Issuance (MUNIF) Facility (due 2015)
• RM2.2 billion Murabahah Medium Term Notes (MMTN) Programme (due 2021)
• RM1.5 billion Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme (due 2013)
• RM1.5 billion Sukuk Musyarakah MTN Programme (due 2033).

The outlook for the ratings is stable. The ratings incorporate PJH’s very strong financial profile, characterised by stable and predictable rental income from the government buildings constructed for the Malaysian government under a build-lease-transfer concession. The ratings also take into consideration the strength of the company’s major shareholders, namely, Petroliam Nasional Berhad (Petronas) through KLCC (Holdings) Sdn Bhd and Khazanah Nasional Berhad (Khazanah), to extend timely financial support in the event of need.

In addition, the ratings acknowledge the strong protection afforded by the creation of designated accounts to capture assigned sublease rental streams with regard to the BBA bonds and notes issued under the RM2.2 billion MMTN programme as well as the moderate protection afforded by negative pledge covenants in respect of the remaining rated obligations.

PJH is the lead developer for Putrajaya, the Federal Government Administrative Capital. Since beginning construction in 1996, PJH has completed the construction of specified government buildings and government quarters under the build-lease-transfer concession. The government buildings were fully handed over to the government in 2010 while the government quarters were handed over in December 2011.
The government offices are constructed on land which the Federal Land Commissioner will lease to PJH for a 25-year tenure immediately after the delivery of the buildings. The buildings are subleased back to the government for an identical tenure. The sublease rental payments for the government buildings, which range from RM2.73 psf to RM3.55 psf, provide a steady source of income for PJH. As of September 30, 2011, the lease rentals captured in the security accounts stood at RM340.5 million, which MARC deems to be sufficient to meet PJH’s near-term debt service redemptions totalling RM280.0 million in 2012.

For financial year ending March 31, 2011 (FY2011), PJH’s revenue continued to decline, registering RM1,497 million (FY2010: RM1,751 million), mainly on account of lower construction receivables as its projects reached the tail-end stage of construction. However, profit before tax was boosted to RM740.7 million (FY2010: RM495.0 million) due largely to gains from disposal of Menara PJH and some parcels of commercial land for a total of RM235.5 million.

PJH’s operating cash flow (CFO) generation remains strong at RM1,093 million (FY2010: RM1,070 million), as a result of stable rental income from government buildings. Lower cash outflow from investing and financing activities have also contributed to the overall improvement in PJH’s cash flow profile. However, MARC notes that a one-off high dividend payment of RM396.0 million was made during the year (FY2010: RM40.9 million; FY2009: RM33.0 million).

MARC observes that despite an increase in PJH’s borrowings to RM5,560 million in FY2011 (FY2010: RM5,504 million), its gearing levels declined to 1.18 times (FY2010: 1.21 times) on the back of an increase in shareholders’ funds. The availability of unutilised credit lines of RM1,000 million (excluding undrawn limits of the rated facilities) affords considerable financial flexibility to PJH.
The stable ratings outlook assumes that PJH’s credit metrics with respect to its cash flow coverage would remain consistent with the assigned ratings in the near-to-intermediate term.

Contacts:
Thian Chow Di, +603-2082 2280/ chowdi@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

What will be fueling the world in 2030 (as reported by The Economist)

(See http://www.economist.com/blogs/graphicdetail/2012/01/energy?fsrc=scn/tw/te/dc/wattsnext): The world will consume 40% more energy in 2030 than it does today, according to BP's World Energy Outlook, though the rate of growth will decrease from around 2.5% a year over the past decade to an annual rate of 1.3% in 2020-30. One source of power has always dominated the energy mix—wood in the pre-industrial age, coal in the industrial revolution and then oil in the 20th century. But by 2030 trends in the energy mix will see fuel shares converge for the first time as gas gains in importance.The amount of energy needed to produce a unit of GDP will also converge as globalization drives energy efficiency, making economic growth far less energy intensive everywhere in the world.

Apple posts record $13.06bn quarterly profits, up 118% (By BBC)

See: http://www.bbc.co.uk/news/business-16712089: Apple reported record-breaking net profits for the three months to 31 December 2011 of $13.06bn (£8.36bn), up 118% from the same period in 2010.

The company also sold 37 million iPhones, more than twice as many as it sold in the last quarter of 2010.

"Apple's momentum is incredibly strong, and we have some amazing new products in the pipeline," said chief executive Tim Cook.

The firm is expected to release its iPad 3 in March this year.

"We are very happy to have generated over $17.5bn in cash flow from operations during the December quarter," said Peter Oppenheimer, Apple's CFO.

"Looking ahead to the second fiscal quarter of 2012, we expect revenue of about $32.5bn and we expect diluted earnings per share of about $8.50."

Japan posts first annual trade deficit in 30 years (By BBC)

(See: http://www.bbc.co.uk/news/business-16712816): Japan has announced its first annual trade deficit in more than 30 years, a setback for a country known for its exports including cars and electronics.

The deficit came in at 2.49 trillion yen ($32bn; £20bn) for 2011, the finance ministry said.

Japan's imports rose 12% and its exports fell 2.7%, compared to the previous year.

The decline in exports was attributed to the impact from the earthquake and tsunami on 11 March.

It reflects fundamental changes in Japan's economy, particularly among manufacturers”

Hideki Matsumura Japan Research Institute

The deficit underscores the pressure that Japanese exporters have come under since the disaster.

Factories were damaged and supply chains disrupted for major exporters including Toyota Motor and Sony.

Exporters' problems have been exacerbated by further disruptions to production in some of their Thailand facilities due to flooding, as well by a rising yen, which makes Japanese products more expensive overseas.

The uncertainty surrounding Europe and the US has caused global investors to turn to the yen, as a safer investment, causing it to appreciate.

Analysts warned the combination of these factors was hurting Japan's exporters as rivals from South Korea and other Asian nations compete in markets which Japanese companies had previously dominated.


"Japan is losing its competitiveness to produce domestically."


On the import side of the trade balance Japan has had to increase the amount of incoming energy supplies, as the Fukushima nuclear disaster saw many atomic power stations being taken offline.

As a result, crude oil imports surged 21.3% by value, liquefied natural gas imports rose 37.5% and petrochemical imports were up 39.5% compared to 2010, government figures showed.

Nuclear power previously accounted for about 30% of electricity generation in Japan.

But since the accident, Tokyo Electric Power and other utilities have been trying to restart their conventional power plants to meet energy needs.

Bank of Japan Governor Masaaki Shirakawa said on Tuesday that the trade deficit would not become a "firmly established trend" attributing it to "temporary factors" such as the increased demands after the earthquake.

However, given that Japan's major export markets, the US and Europe, are seen going into recession some analysts are forecasting that the trade deficit will continue.

Takuji Okubo of Societe Generale in Tokyo said Japan would see a trade deficit till 2014 because of "the combination of strong demand in Japan because of earthquake and reconstruction demand and weak demand outside of Japan in Europe and the US".

NACF’s AAA issue rating unaffected by reorganisation plan

Published on 20 January 2012
Based on further details recently made available to RAM Ratings on National Agricultural Cooperative Federation’s (NACF or the Cooperative) reorganisation plan, RAM Ratings continues to hold the view that the AAA/Stable rating of NACF’s senior notes under its Medium-Term Notes Programme of up to RM3.3 billion (MTN Programme) will be unaffected.

We opine that the collective roles of NACF and its newly established subsidiary, NH Bank (previously known as the Cooperative’s Credit and Banking Unit), are important to the country’s agricultural policies and will thus continue to benefit from the Government of Korea’s sturdy support. NACF’s reorganisation involves separating its profit centres into 2 new holding companies, i.e. financial and non-financial, which is due to be completed by 2 March 2012. Post-reorganisation, NH Bank will be added as a co-obligor in respect of NACF's MTN Programme.

Media contact
Gladys Chua
(603) 7628 1049
gladys@ram.com.my

Indonesia keeps stacking its chips (By IFN)

(See IFN) INDONESIA: The country continues to ride high on its return to investment grade status following a second upgrade to its credit rating in the span of one month; this time by Moody’s.

Investment flows have already been picking up even before it received its first upgrade by Fitch in December last year; with foreign direct investment (FDI) hitting a record of US$19.3 billion in 2011, also the highest in Southeast Asia. Its FDI is also expected to rise another 25% this year.

Two out of three nods from the world’s leading rating agencies – S&P has yet to raise its rating, currently the highest level below investment grade – is certain to open up room for further investment inflows; and the Sukuk mart is expected to be among the sectors with the most to benefit.

“The interesting area for Indonesia here is Sukuk. For some Middle East buyers who could not invest earlier because it was not investment grade, this is a new thing for them, which is good," Guan Ong, the principal at Blue Rice Investment Management, a hedge fund that specializes in fixed income, was quoted as saying.

Indonesia’s stacked chips also could not have come at a better time, with the global economy looking the way it is. Furthermore, Moody’s has also noted that high-yield corporate bond issuances in Asia will remain “highly uncertain” in the next few months as “credit markets stay choppy” on concerns over European sovereigns and China’s corporate governance issues keeping investors cautious.

“Caution and uncertainty look to be the by-words for at least the early part of 2012; and while Asian corporates may make preparations for the reopening of the high yield bond markets, it will likely take a higher speculative-grade rated, existing issuer to break the deadlock and open the floodgates for smaller and first-time names to the market,” said Laura Acres, a vice-president and senior credit officer at Moody’s.

For Asia this year, what better name is there than Indonesia to set credit flowing?

International Reserves of BNM as at 13 January 2012

(See BNM): The international reserves of Bank Negara Malaysia amounted to RM423.5 billion (equivalent to USD133.7 billion) as at 13 January 2012. The reserves position is sufficient to finance 9.6 months of retained imports and is 4 times the short-term external debt.

See also: BNM Statement of Assets & Liabilities as at 2012-01-13 2012-01-13

MARC AFFIRMS ITS A+, A and BBB+ RATINGS ON RCE ADVANCE SDN BHD's CLASS A, B AND C MTNs RESPECTIVELY; REVISES OUTLOOK TO STABLE

Jan 20, 2012 -
MARC has affirmed its ratings of A+, A and BBB+ on outstanding Class A, B and C notes issued by RCE Advance Sdn Bhd (RCEA) under its RM420 million Fixed Rate Medium Term Notes Programme. The ratings affect RM100 million of outstanding notes under Class A, RM98.5 million under Class B and RM60 million under Class C. The ratings outlook has been revised to stable from negative.

RCEA is a special purpose company wholly owned by RCE Marketing Sdn Bhd (RCEM), the originator of the six collateral pools (the collateral portfolio) of personal loans backing the rated notes. The collateral pools for this transaction consist solely of loans to members of Koperasi Wawasan Pekerja-Pekerja Berhad (KOWAJA), RCEM's largest business partner and borrower. RCEM has a continuing role under the transaction to replace defaulted and/or prepaid loans to maintain the transaction's three-month collateral cover ratio of 166% at all times. RCEM has also provided an undertaking to cover any shortfall in the sinking fund account for the notes. The notes also benefit from an irrevocable guarantee from RCE Capital Berhad, the ultimate holding company of RCEM.

MARC’s revision of its outlook reflects increased certainty that RCEM will be able to maintain the transaction's collateral cover covenant notwithstanding prevailing regulatory constraints which are affecting its ability to grow loans and fund loan growth. The increased certainty is supported by the transaction’s actual demonstrated ability to remain in compliance with its minimum covenanted level of 166% at all times, which is tested based on a trailing three-month total. Since December 1, 2010, when KOWAJA was first ordered to cease its lending activities over non-compliance with practice guidelines and prohibited from assigning newly originated loans to RCEM and other third parties, the prohibitions have been relaxed. MARC notes that in a recent decision on June 9, 2011 by the Cooperative Commission of Malaysia (CCM), KOWAJA was granted the approval to resume obtaining funds from RCEM, subject to a funding limit of RM200 million, among other conditions. While this means that RCEM has, to an extent, resumed lending to KOWAJA, it remains clear that the company has still not regained the operating flexibility it had earlier possessed. MARC understands that RCEM and KOWAJA are still working to achieve full compliance with regulatory guidelines.

The affirmed ratings continue to reflect healthy collateral coverage for the notes and satisfactory performance of RCEA’s collateral pools as result of the transaction’s structural mechanism for replacing defaulted and prepaid loans with performing ones from RCEM. Nonetheless, the ratings are moderated by RCEM’s heightened exposure to regulatory risk and increasing competition from other general loan financing companies.

As of September 30, 2011, all tranches of Class A and B notes had met their minimum required collateral coverage ratio of 1.66 times, supported by a collateral portfolio balance of RM216.0 million and designated account balances of RM74.6 million. During the reviewed period (October 2010 to September 2011), RCEA had redeemed RM10 million and RM6.5 million of Class A and B notes respectively.

Meanwhile, the reviewed average default rates for the collateral pools, which ranged from 0.3% to 0.5%, have remained relatively unchanged from the previous year (2010 review: 0.3% to 0.4%). The defaulted loans comprised 59 accounts with a collective outstanding balance of RM2.01 million, representing a default rate of 5.32% on the collateral portfolio’s outstanding principal balance; this default rate falls well under MARC’s cumulative default expectations (up to 10% at year 2015). At the same time, the range of average monthly prepayment rates was observed to be 2.6% to 4.0% and higher than last year’s (2010 review: 1.4% to 2.2%). The increase in prepayments was mainly driven by heavy refinancing activity in the month of April 2011 due to an influx of more competitive financing options in the market. Nonetheless, the risk of similar prepayment increases in the future are expected to be moderated by RCEM’s available performing receivables for substitution and the company’s sizeable cash balances, which will be utilised to provide necessary coverage for the notes. At the end of the reviewed period, the collateral portfolio was comprised of 8,611 seasoned accounts with an average remaining term to maturity of 67 months.

RCEM’s earnings results for its financial year ended March 31, 2011 (FY2011) showed improvement on the back of a 3.7% growth in revenue, despite a change in income recognition method from sum-of-digits to amortised cost, reflecting a higher net interest margin of 16.8% compared to 14.0% in the previous year. Meanwhile, RCEM’s loans and receivables contracted by 4.6% to RM1.08 billion at year-end owing to the adoption of FRS139, which involves more prudent methods of valuation for financial assets and liabilities. In FY2011, RCEM’s cash and cash equivalents rose to RM512.53 million from RM281.20 million following increases in cash flow from operational and financial activities. Consequently, its net gearing ratio as of end-FY2011 fell to 1.68 times from 2.04 times based on net borrowings of RM592.51 million over a total equity of RM351.97 million. Overall, RCEM continues to maintain a moderate credit risk profile.

Contacts:
Ruben Khoo Sheng Luen, +603-2082 2265/ rubenkhoo@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.