RAM Ratings closely monitoring outcome of negotiation talks on potential merger between RHB Capital and CIMB/Maybank

Published on 01 June 2011

On 31 May 2011, Malayan Banking Berhad (which holds AAA/Stable/P1 financial institution ratings) and CIMB Group Holdings Berhad (which carries AA1/Stable/P1 corporate credit ratings) announced that they had each received approval from Bank Negara Malaysia to separately commence talks with RHB Capital Berhad (RHB Capital) and its substantial shareholders for a possible merger of their respective businesses. RHB Capital is the ultimate parent company of RHB Bank Berhad, RHB Islamic Bank Berhad and RHB Investment Bank Berhad (all rated AA2/Stable/P1 by RAM Ratings), and is currently the fifth-largest banking group in Malaysia.

We will closely monitor the outcome of these negotiations and will make further rating announcements as and when sufficient details are made known. In assessing the merits of a potential merger, RAM Ratings will take into consideration business synergies, as well as acquisition costs and their associated funding and capital structures.

http://www.ram.com.my/pressReleaseView.aspx?ID=42b608ac-837f-4885-b7f0-daed7dc39028

RAM Ratings: Impact of electricity tariff hike on TNB’s key financial metrics is neutral

Published on 01 Jun 2011

RAM Ratings expects the electricity tariff hike (effective today) to have a largely neutral impact on Tenaga Nasional Berhad (TNB or the Group). Given that the rise in tariffs will be offset by the higher price of gas payable to Petroliam Nasional Berhad (Petronas), TNB’s key financial metrics, i.e. margin on operating profit before depreciation, interest and tax and funds from operations debt coverage ratio, are likely to be unaffected by this move. 

The Government has granted TNB an average 7.12% increase in electricity tariffs of which 5.12% is to recover the Group’s additional fuel expenditure based on the higher price of gas from Petronas, which will be elevated from RM10.70 per million metric British thermal units (mmBtu) to RM13.70 per mmBtu while the remainder 2% is to partly recover the higher operating costs since June 2006.

Nevertheless, any pressure on TNB’s margins will likely be exerted by rising coal prices. As coal is procured at international prices, the Group remains vulnerable to unfavourable movements in coal prices and/or foreign-exchange rates. The newly revised tariffs are still based on a coal price of USD85 per metric tonne (MT) even though the Group’s average coal procurement price is higher. We expect TNB’s average coal price to come up to USD120 per MT in FYE 31 August 2011. Nevertheless, the stronger ringgit against the US dollar may help moderate negative effects of its heftier coal-powered generation costs. On this note, a fuel-cost pass-through (FCPT) mechanism will also be introduced under which TNB’s fuel costs will be reviewed every 6 months to allow the electricity giant to pass on increases in fuel prices (i.e. gas, coal and oil). By the same token, TNB will also – under the FCPT mechanism – pass through any savings from a retracement in fuel costs to consumers. While the implementation of the FCPT mechanism will allow the utility company to mitigate the impact of fluctuating fuel costs, any tariff adjustment then remains to be seen.

www.ram.com.my

RAM Ratings assigns preliminary AAA(bg)/P1 ratings to Adventa’s proposed debt issues

RAM Ratings has assigned preliminary enhanced ratings of P1 and AAA(bg) to Adventa Berhad’s (Adventa or the Group) proposed RM150 million Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) Programme (2011/2018); the long-term rating has a stable outlook.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD’S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

http://www.marc.com.my/ratbase/pub.press.detail.php?aid=3960

RAM Ratings downgrades rating of SESCO's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has downgraded the rating of Syarikat SESCO Berhad’s (SESCO) RM605 million Al-Bai Bithaman Ajil Islamic Debt Securities (2001/2012), from AAA to AA1; the long-term rating has a stable outlook. SESCO is the exclusive provider of electricity and sole off-taker of all the generating capacity in Sarawak.

The rating downgrade reflects the weaker financial profile of SESCO arising from the heavier capacity-payment obligations anticipated via power purchase agreements for the new and sizeable power plants under the Sarawak Corridor of Renewable Energy (or SCORE). The sizeable new power-generating capacity will also increase demand risk for SESCO and its holding company, Sarawak Energy Berhad (SEB). As an investment-holding company, SEB relies on residual cashflow from its subsidiaries, particularly SESCO (its utility arm), to support its heftier debt load. On this account, the credit profiles of the 2 entities are viewed to be closely linked. For further details on SEB, please refer to our press release on 24 May 2011, entitled RAM Ratings assigns preliminary AA1 rating to Sarawak Energy’s proposed RM15 billion sukuk.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD'S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC (May 25, 2011): MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

www.marc.com.my

RAM Ratings reaffirms Prai Power's AA3 rating

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA3 rating of Prai Power Sdn Bhd’s (Prai Power or the Company) RM780 million Al-Istisna Fixed-Rate Serial Bonds (Bonds), with a stable outlook. Prai Power is an independent power plant (IPP) that owns and operates a 350-MW combined cycle, gas-turbine power plant in Prai, Penang (the Plant).

The rating remains supported by Prai Power’s strong business profile, underscored by the favourable terms of its power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). For the period under review, the Company was able to claim 99.2% of its available capacity payments (ACPs) and fully pass through its fuel costs to TNB.

Nonetheless, Prai Power has utilised much of its allowance for scheduled maintenance permitted under the PPA during the first (2009) and second (2010) years of its third 3-year availability target (AT) block ending 31 December 2011. Given this, it remains a challenge for the Company to meet the AT requirement for the current AT block; should there be a breach, the Company would have to pay penalties to TNB. Meanwhile, the Plant underwent more unscheduled maintenance in 2010. Based on RAM Ratings’ sensitivity tests, however, Prai Power’s debt-servicing ability is envisaged to remain intact, with a minimum financial service coverage ratio of 1.50 times (with cash balances, post-distribution) on principal repayment dates. Our sensitised cashflow assumes that the Company will adhere to its financial covenants throughout the Bonds’ tenure (i.e. on a forward-looking basis as opposed to only the year).

Meanwhile, the single-shaft design of the Plant is an inherent technological limitation for Prai Power as the entire facility would have to be shut down should it experience any disruption to any component attached to the generator. The compensation from its operation and maintenance service provider - capped at RM9 million - and insurance against revenue losses, while in place, may not be sufficient to cover the Plant’s revenue losses should it experience lengthy unscheduled outages, as was the case in 2006. While the losses in ACPs so far have not dented Prai Power’s financial profile, we note that its debt-servicing ability may be affected by the recurrence of lengthy unscheduled outages. In addition, the rating remains moderated by regulatory and single-project risks, similar to all other IPPs.

www.ram.com.my

Bond Market Performance 24 May 2010 - 24 May 2011

The one year performance (24 May 2010 - 24 May 2011) of the Conventional bonds versus the Islamic sukuk in the Malaysian bond market using the BPA Malaysia FiiX Bond Index Series.

Double click on the image to enlarge.

Based on the graph, the sukuk market outperforms the conventional bond market.

See: www.bpam.com.my

RAM Ratings reaffirms AA1 rating of GB3's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA1 rating of GB3 Sdn Bhd’s (GB3 or the Company) RM850 million Senior Secured Al-Bai Bithaman Ajil Bond Facility (ABBA Bonds), with a stable outlook. GB3 is an independent power producer (IPP) operating a 640-MW combined-cycle, gas-turbine power plant (the Plant) in Lumut, Perak.

The rating remains supported by GB3’s strong business profile, underscored by the favourable terms of its Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB). Similar to all other IPPs, however, the rating is moderated by regulatory and single-project risks.

In 2010, GB3 incurred available capacity payments (ACPs) loss of RM5.70 million, as its unscheduled outage rate (calculated based on a 365-day rolling average) exceeded the PPA limits following an incident involving one of its transformers in May 2009. However, there had been no material financial impact on the Company as such ACP losses and penalties had been largely compensated by both the insurer and the IPP’s operations and maintenance (O&M) service provider.

Meanwhile, we note that it may be challenging for GB3 to meet the requirement on its 3-year availability target (“AT”) due to the tight average AT of 91.53% projected for the third 3-year AT block (2009 to 2011) versus the PPA limit of 91.50%, which leaves little room for variations. Nonetheless, some comfort can be derived from the liquidated damages up to RM4 million claimable under its O&M Agreement.

Based on a stressed scenario, GB3’s minimum and average finance service cover ratios (FSCRs) (with cash balances, post-distribution) on principal repayment dates are projected to come in at 1.25 times and 1.51 times, respectively. RAM Ratings assumes that the Company will adhere to its financial covenants throughout the ABBA Bonds’ tenure (i.e. on a forward-looking basis). Such financial covenants include compliance with its finance service reserve account requirement, a post-distribution FSCR of 1.25 times and a debt-to-equity ratio of 90:10. Notably, the minimum covenanted FSCR is less stringent than those of the other AA-rated IPPs in RAM Ratings’ portfolio. All said, GB3's debt-servicing ability has remained strong to date, with its FSCR (with cash balances, post-distribution) hovering around 1.89 to 2.71 times over the past 5 years.

Full report: www.ram.com.my

RAM Ratings reaffirms TNB's AAA debt rating

RAM Ratings (20 May 2011): RAM Ratings has reaffirmed the AAA rating of Tenaga Nasional Berhad’s (TNB or the Group) USD500 million equivalent Murabahah Medium-Term Notes Programme (2005/2025); the long-term rating has a stable outlook.

The rating reflects TNB’s position as Malaysia’s national electricity company, with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah. TNB also plays a crucial role as the sole-off-taker for the generating capacity and electrical energy produced by all the independent power producers (IPPs) in Peninsular Malaysia. Meanwhile, the Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia’s generating capacity despite the growing presence of IPPs in the past decade.

In view of the strategic nature of TNB’s role as Malaysia’s national electricity company, it enjoys strong implicit support from the Government, i.e. its major shareholder. Previous tariff reviews - which had helped the utility giant pass on its rising coal costs to consumers - and subsidised gas prices underline the implicit support received by TNB.

As at end-August 2010, TNB’s balance sheet was weighed down by its hefty RM21.26 billion debt burden. As half of this was denominated in Japanese yen and US dollars, the Group is exposed to fluctuations in foreign-exchange (forex) rates. Nonetheless, we recognise the improvement in TNB’s key financial metrics after the Group trimmed its debt level from nearly RM30 billion 5 years ago; as at end-August 2010, its gearing ratio had eased to 0.74 times. After including its heavy debt load from the fixed capacity-payment obligations under the Group’s Power Purchase Agreements (PPAs) with the various IPPs, its adjusted gearing ratio climbed up to 1.74 times while its adjusted funds from operations debt coverage stood at 0.23 times as at end-August 2010.

Given the increasing dependence on coal-powered generation – which accounted for 40.2% of Peninsular Malaysia’s generation mix in FY Aug 2010 compared to 28.6% the previous corresponding period – TNB remains vulnerable to unfavourable movements in coal prices and forex rates, as supply is procured at international prices. As coal costs already represent more than half of its total fuel costs and in view of still-rising coal prices, the Group’s margins will face further downward pressure. Nevertheless, the impact of heftier generation costs may be moderated by the stronger ringgit against the US dollar.

Full article: www.ram.com.my