RAM Ratings reaffirms HSBC Malaysia’s AAA/P1 ratings

Published on 17 June 2011

RAM Ratings has reaffirmed HSBC Bank Malaysia Berhad’s (HSBC Malaysia or the Bank) respective long- and short-term financial institution ratings, at AAA and P1. Concurrently, we have also reaffirmed the AA1 rating of the Bank’s RM1 billion Tier-2 Subordinated Bonds (Sub Bonds). Both the long-term ratings have a stable outlook. The 1-notch rating differential between the Bank’s long-term financial institution rating and that of its Sub Bonds reflects the latter’s subordination to the Bank’s senior unsecured creditors.

Meanwhile, the financial institution ratings are premised on HSBC Malaysia’s strong international franchise and established domestic market position, on top of its healthy asset quality and adequate capitalisation. It is the largest locally incorporated foreign bank in Malaysia by asset size and is wholly owned by HSBC Holdings plc (HSBC Holdings or the Group), a global financial institution. Aside from parental support, the Bank is also able to leverage on the HSBC Holdings’ international network, brand name, expertise and best practices.

In FY Dec 2010, HSBC Malaysia charted a 19% growth in its gross loans; this followed the Bank’s cautious lending strategy amid the uncertain economic environment the year before, which had resulted in a 3.3% contraction. The Bank’s asset quality had also improved, with its gross impaired-loan ratio easing to 2.0% as at end-December 2010 (end-December 2009: 2.3%) on the back of a lower quantum of net newly impaired loans. For the year, the Bank achieved a stronger pre-tax profit of RM1.0 billion (FY Dec 2009: RM882.7 million), supported by generally higher income. Its funding and liquidity positions are viewed to be sturdy, with a loans-to-deposits ratio of 70.5% and a liquid-asset ratio of 48.3% as at end-December 2010. At the same time, the Bank’s overall risk-weighted capital-adequacy ratio came up to 13.7%. Moving forward, HSBC Malaysia’s capitalisation is expected to remain adequate, taking into account its targeted loan growth this year.

In 1Q FY Dec 2011, HSBC Malaysia’s asset quality, funding, liquidity and capitalisation levels remained stable. Nonetheless, its pre-tax profit slipped slightly to RM294.9 million (1Q FY Dec 2010: RM296.7 million), mainly due to a higher collective impairment charge on the back of stronger loan growth. All said, we expect the Bank’s financial performance to improve in fiscal 2011, capitalising on the country’s resilient economic growth.

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

RAM Ratings reaffirms ratings of Bandar Raya’s debt facilities, revises outlook from stable to negative

Published on 15 June 2011

RAM Ratings has reaffirmed the respective long- and short-term ratings of Bandar Raya Developments Berhad’s (BRDB or the Group) RM200 million Nominal Value Commercial Papers/Medium-Term Notes Programme (2007/2014), at A1 and P1. At the same time, the A1 rating of BRDB’s RM100 million Bonds with warrants (2007/2012) has also been reaffirmed. The outlook on both long-term ratings has been revised from stable to negative.

The revised outlook is premised on BRDB’s weaker financial profile as a result of slower-than-expected property sales and delays in new launches, which had steadily reduced its unbilled sales from RM879 million as at end-December 2008 to RM225 million as at end-March 2011. This had in turn affected its debt coverage, which came in below our expectations. Year-on-year in FY Dec 2010, BRDB’s operating profit before depreciation, interest and tax debt coverage ratio shrank from 0.27 times to 0.12 times while its funds from operations debt coverage ratio descended from 0.23 times to 0.12 times.

Going forward, the Group may face more challenges as most of its future projects are within the keenly competitive medium-to-high-end condominium market. BRDB’s ratings will face downward pressure if its unbilled sales keep getting depleted and/or its debt coverage deteriorates further. On the other hand, the negative outlook could be reverted to stable if BRDB is able to replenish its unbilled sales and demonstrate sustainable improvement in its financial profile.

The reaffirmation of the ratings, meanwhile, is premised on BRDB’s established reputation and strong branding in high-end developments, including The Troika in KLCC and One Menerung in Bangsar. Its recently launched 6 CapSquare in Kuala Lumpur achieved a take-up rate of more than 50% in less than 6 months. The management has planned about RM4 billion of new projects in various parts of the Klang Valley and Johor over the next 2 years. The Group recently replenished its land bank through the formation of various joint ventures - marking a shift in focus from BRDB’s traditional strongholds to new areas in Selangor (Seri Kembangan, Rawang and Gombak), Penang and Johor (Nusajaya); these are expected to provide development opportunities over the longer term. BRDB also derives some revenue stability from its pool of investment properties, with Bangsar Shopping Centre as its chief contributor.

Elsewhere, BRDB’s 57%-owned chipboard-manufacturing arm, Mieco Chipboard Berhad (Mieco), managed to turn around with a pre-tax profit of RM2 million in FY Dec 2010. Although demand for chipboard seems to have recovered somewhat, it remains to be seen if Mieco can sustain its improved performance, especially with additional capacity from the recent recommencement of operations at its largest plant, which had been closed since November 2008. The still-competitive operating environment, coupled with rising raw-material prices, may add pressure on its margins.

As at end-March 2011, BRDB’s unencumbered cash and bank balances amounted to only RM113 million against RM318 million of short-term debts. Nonetheless, this is mitigated by a recently secured term-loan facility of up to RM450 million.

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

MARC DOWNGRADES OFFSHOREWORKS CAPITAL’S DEBT RATINGS, MAINTAINS ITS RATINGS AT MARCWATCH NEGATIVE

Jun 14, 2011 -

MARC has downgraded its long-term and short-term Sukuk ratings on Offshoreworks Capital Sdn Bhd (OWC) to BBIS and MARC-4IS, from A+IS and MARC-2IS respectively. The Sukuk ratings remain on MARCWatch Negative where they were initially placed on March 15, 2011 on the basis of an expected covenant breach. The rating actions affect RM200.0 million of outstanding Sukuk Musyarakah and RM150.0 million of outstanding Musyarakah Commercial Paper/Medium Term Notes (MCP/MMTN). OWC is a funding vehicle of oilfield services provider Offshoreworks Holdings Sdn Bhd (OHSB). The OHSB group participates in the underwater diving, geosurveying, construction and engineering, and ship management and chartering segments of the oilfield services sector.

The multiple-notch downgrades reflect severe unaudited losses of RM267.0 million for the 12 months ended December 31, 2010 (FY2010) at OHSB. The full year losses were more than twice of OHSB's pre-tax losses of RM119.5 million for the 11 months to November 30, 2010 after additional charged-out expenses totaling RM218.3 million for non-recoverable cost of idle vessels and equipment (RM136.6 million) and write-down of amounts due from work-in-progress (RM81.7 million). As 75% of the provisions were made in the final quarter of FY2010, the full year losses were significantly worse than MARC's expectations. OHSB's accounting practice of recognising revenue based on costs incurred prior to acceptance by the customer has masked weaknesses in its operating performance and the material adverse change in its credit profile in the last two financial years.

The loss last year resulted in retained losses of RM175.1 million and negative shareholders' funds of RM56.8 million as of end December 2010 compared to a retained profit of RM92.9 million a year earlier. As a result, OHSB is currently in breach of the Sukuk’s gearing covenant; on a pro-forma basis, it requires a RM214.2 million equity infusion to restore its debt to equity ratio to its covenant level of 2.5 times based on its end-December 2010 unaudited financial statements.

Notwithstanding the group's outstanding order book of RM1.45 billion as at December 2010, MARC believes that the group faces significant challenges as a going concern after the huge losses, particularly in light of its depleted capital and strained liquidity. Its cash balances excluding fixed deposits had fallen sharply to a modest RM5.2 million from RM70.8 million in the intervening three month period between September 30, 2010 and December 31, 2010. MARC understands that the group has commenced disposal of some of its non-core operating assets, seeking new investors and is also renegotiating operating lease payment schedules for some of its vessels. Additionally, OWC is seeking temporary waiver of its financial covenant breach, sukukholders' approval to defer its sinking fund build up payments up to August 2011 and release of some moneys currently in the sinking fund for its immediate working capital purposes.

The continuing MARCWatch placement reflects OHSB's increased susceptibility to adverse circumstances leading to default. Failure to develop a credible turnaround plan and to obtain the support of its sukukholders to restructure its rated obligations will most likely place OWC at risk of an acceleration of the rated obligations and immediate demand for repayment. Additionally, MARC is concerned that an audit of OHSB's FY2010 financial statements could lead to a further increase in reported losses. MARC will monitor developments at OHSB and OWC to resolve the MARCWatch placement.

Contacts:
Eric Chua, +603-2082 2245/ cheekiong@marc.com.my;
Gary Lim Chun Pin, +603-2082 2243/ cplim@marc.com.my;
Francis Xaviour Joe, +603-2082 2279/ fxjoe@marc.com.my.

RAM Ratings reaffirms UOBM's AA1/P1 ratings, maintains positive outlook

Published on 13 June 2011
RAM Ratings has reaffirmed United Overseas Bank (M) Bhd’s (UOBM or the Bank) long-term financial institution ratings at AA1, with a positive outlook, while also reaffirming its P1 short-term rating. At the same time, the AA2 rating of the Bank’s RM500 million Subordinated Bonds has been reaffirmed, also with a positive outlook.

The outlook on UOBM’s long-term financial institution rating had been revised from stable to positive in September 2010, premised on the Bank’s improving asset-quality indicators. Its gross impaired-loan ratio had eased to 2.2% as at end-March 2011 (end-March 2010: 3.4%). While partly driven by a sizeable 24% loan growth in FY Dec 2010, the absolute value of the Bank’s gross impaired loans had also reduced, aided by stronger recoveries and fewer newly classified impaired loans. UOBM intends to expand its loan base by another 20% this year, with a focus on residential property mortgages and loans to small and medium-sized enterprises. Although RAM Ratings notes the improvements in the Bank’s loan-quality indicators, a longer track record will be required for an upgrade of its financial institution ratings given its relatively robust lending growth of late and aggressive loan-expansion targets.

Elsewhere, UOBM’s loans-to-deposits ratio has also been easing, albeit still at the higher end of the spectrum at 89% as at end-March 2011 (end-March 2010: 94%). In FY Dec 2010, the Bank’s credit-cost ratio came up to 0.6% (FY Dec 2009: 0.5%), primarily attributable to increased collective impairment provisions. Meanwhile, its overall and tier-1 risk-weighted capital-adequacy ratios stood at a sturdy 16.7% and 14%, respectively, as at end-December 2010 (end-December 2009: 14.9% and 13.1%).

With its strong loan expansion, higher fee income and manageable credit costs, UOBM’s commendable profit track record carried through to FY Dec 2010, when pre-tax profit advanced 20% to RM830 million (FY Dec 2009: RM689 million). For the same period, the Bank achieved a return on equity of 22% and a return on assets of 1.8% – exceeding the Malaysian banking industry’s respective averages of 16.5% and 1.5%. UOBM is well poised to benefit from the trend of rising interest rates this year, given that about 95% of its financing facilities bear floating rates.

RAM Ratings notes the financial flexibility and support UOBM derives from its parent, Singapore-domiciled United Overseas Bank Limited (UOB Singapore). Such support is expected to be readily extended if needed, as UOBM is key to UOB Singapore’s strategy of becoming a strong regional bank. The 1-notch differential between UOBM’s AA1 long-term financial institution rating and the AA2 rating of its Subordinated Bonds reflects the subordination of the debt facility to the Bank’s senior unsecured obligations.

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

RAM Ratings reaffirms F&N Capital's AA1(s)/P1(s) ratings, with stable outlook

Published on 13 June 2011
RAM Ratings has reaffirmed the respective enhanced long- and short-term ratings of AA1(s) and P1(s) for F&N Capital Sdn Bhd’s (F&N Capital) RM1 billion Commercial Papers/Medium-Term Notes Programme (2008/2015) (CP/MTN); the long-term rating has a stable outlook. F&N Capital is a treasury company that is wholly owned by Fraser & Neave Holdings Bhd (F&N Holdings or the Group). The CP/MTN’s enhanced ratings are based on the credit-risk profile of F&N Holdings, the provider of the unconditional and irrevocable corporate guarantee on the CP/MTN.

The reaffirmed ratings reflect F&N Holdings’ leading position in several food-and-beverage (F&B) business segments, strong balance sheet, robust cashflow-protection measures, diversified product range, modest geographical presence, expansive distribution channels and stable product demand. The ratings are, however, moderated by the more competitive and challenging landscape in the F&B market, the Group’s exposure to fluctuating raw-material and packaging costs, and the licence-renewal risk for brands not owned by F&N Holdings or its parent company, Fraser and Neave Limited.

As the Group’s manufacturing and distribution of products under licence from The Coca-Cola Company (TCCC) is coming to an end in September 2011, the financial performance of F&N Holdings’ soft-drinks division is envisaged to soften, particularly in FYE 30 September 2012 (FY Sep 2012).

TCCC products account for some 12%-16% of the Group’s sales and operating profit before interest and tax (OPBIT). “As more TCCC products are expected to be introduced in the local market, along with new launches from other producers, the soft-drinks sector is expected to become more competitive. Likewise, F&N Holdings’ peers in the dairy-products market have been actively expanding their market shares. Due to the capacity limitations of the Group’s dairy plant in Petaling Jaya, it has not been able to respond to such competition, thereby allowing its rivals to gain market share,” notes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

Nonetheless, F&N Holdings’ capacity constraints are expected to be resolved upon the commencement of its dairies plant in Pulau Indah. Coupled with its plans to continue launching new products (both in the dairies and soft-drinks markets), the Group is envisaged to stay dominant in these sectors.

To further strengthen its foothold in the F&B market, F&N Holdings is on the lookout for potential acquisition targets, both domestic and regional. While acquisition targets have yet to be identified, the Group has budgeted around RM500 million for such investments over the next 2 years, besides RM564 million of capital expenditure (capex) for the next 3 years.

“The decline in financial performance, potential increase in debt level to fund its planned capex and budgeted cash outflow for potential acquisitions are expected to thin F&N Holdings’ funds from operations debt cover to 0.40 times in FY Sep 2012, before it recovers to 0.60 times the following year. Nevertheless, the Group’s balance sheet is expected to remain sturdy, with a net gearing ratio of 0.4 to 0.5 times over the next 3 years,” opines Kevin Lim.

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

RAM Ratings is neutral on Genting’s proposed asset acquisitions in Miami

Published on 07 June 2011

RAM Ratings opines that the proposed acquisitions by Genting Berhad’s (Genting or the Group) indirectly owned subsidiary - Bayfront 2011 Property, LLC (Bayfront) - in Miami, Florida, will have no immediate impact on the Group’s credit profile. Genting’s respective long- and short-term corporate credit ratings currently stand at AAA and P1 while the RM1.60 billion Medium-Term Notes Programme (2009/2024) of its wholly owned GB Services Berhad carries an enhanced issue rating of AAA(s), backed by an unconditional and irrevocable corporate guarantee from Genting. Both long-term ratings have a stable outlook.

On 27 May 2011, Genting announced that Bayfront had entered into a sale and purchase agreement with The McClatchy Company and Richwood, Inc to acquire approximately 13.9 acres of freehold waterfront properties in downtown Miami; these include an office-cum-warehouse building (known as the Miami Herald Building) and land for USD236 million (approximately RM710 million) in total.

RAM Ratings is of the view that the proposed acquisition has no impact on Genting’s credit profile given the size of the asset acquisitions vis-à-vis the Group’s strong balance sheet and enviable cash hoard. “Genting’s consolidated cash amounted to RM15.46 billion as at end-March 2011. Although the purchase consideration will be largely debt-funded, we expect Genting’s cashflow-protection measures to remain strong at around 0.50 times (annualised 1Q FY Dec 2010: 0.67 times). This is backed by its stable contribution from Resorts World Genting (RWG) as well as higher-than-expected contribution from Resorts World Sentosa (RWS).” elaborates Kevin Lim, RAM Ratings’ Head of Consumer and Industrial Ratings.

The proposed acquisition is expected to pave way for the Group’s proposed development of Resorts World Miami (RWM) over the medium to long term. This represents Genting’s second venture in the United States, after its New York’s video lottery facility – Resorts World New York (RWNY), which is slated to open in 2H 2011. The initial master plan for Resorts World Miami will include mixed developments such as hotels and convention as well as entertainment centres. We note that if Genting were to proceed with the proposed development on a big scale without gaming operations, the corresponding return on investment is envisaged to be lower than that of its existing integrated resorts with gaming operations such as RWS and RWG. As a result, RWM may not be a major contributor to the Group’s earnings. RWM would also need to compete with existing renowned resorts in Miami.

However, we do not discount the possibility that Genting may expand its gaming operations should Florida’s gaming industry be liberalised and the development of large-scale destination resorts with gaming facilities be allowed. All said, RAM Ratings will reassess the impact of the proposed development on the Group’s credit profile upon greater clarity on the proposed development plans.

MARC AFFIRMS ITS AAA RATING ON CAGAMAS MBS BERHAD’S RM1,555 MILLION ASSET-BACKED FIXED RATE SERIAL BONDS (CMBS 2004-1); OUTLOOK STABLE

Jun 6, 2011 -

MARC has affirmed the AAA rating of Cagamas MBS Berhad’s (Cagamas MBS) asset-backed fixed rate serial bonds of RM1,555.0 million (CMBS 2004-1) with a stable outlook. The rating action affects the outstanding Series 3 and Series 4 of CMBS 2004-1, totaling approximately RM635.0 million. The transaction’s affirmed rating reflects strong credit enhancement levels for the outstanding bonds, supported by a collections account balance of RM408.5 million and the outstanding principal of non-defaulted mortgages of RM629.8 million. The collateral pool, which comprises highly seasoned mortgage loans of high credit quality, continues to show stable performance. The affirmed rating also benefits from satisfactory management of collateral servicing and transaction administration.

Cagamas MBS is a limited purpose entity and a wholly-owned subsidiary of Cagamas Holdings Berhad (Cagamas Holdings) whose principal activities are restricted to securitising government staff housing loans (GSHLs), originated under both Islamic and conventional principles, from the Government of Malaysia (GOM), by issuing asset-backed securities. The collateral backing this transaction is a pool of eligible GSHLs (Portfolio 2004-1) granted to government pensioners and serviced by direct deductions from the borrowers’ pension accounts. The GOM’s Housing Loans Division, or Bahagian Pinjaman Perumahan (BPP), is the servicer of Portfolio 2004-1.

Based on Cagamas’ quarterly servicer report for Portfolio 2004-1 dated April 20, 2011 (the reporting date), the outstanding mortgage portfolio comprised 37,382 fixed-rate mortgages with an outstanding pool balance of RM638.8 million, compared to the portfolio’s position at issuance represented by 68,396 fixed-rate mortgages worth RM1,935.7 million in total. The transaction’s credit enhancement level has risen further since MARC’s last review in October 2010 to 168.9% for the RM635.0 million outstanding bonds. The substantial credit enhancement level is attributed to the strong performance of the collateral pool, which continues to register a low cumulative default rate of 0.46% versus MARC’s 5.53% assumed cumulative default rate. The stable performance of the collateral pool benefits from its weighted average seasoning factor of 17.9 years. The majority of defaults as of the reporting date arose due to causes which are administrative in nature, including delays in notification of borrowers’ deaths and pending MRTA insurance claims. MARC considers mortgages in arrears for nine months or more as defaults and mortgages in arrears for less than 9 months as delinquencies. At the reporting date, total delinquent mortgages constituted 1.7% of the initial mortgage pool balance.

MARC’s cash flow analysis on the transaction demonstrates that the bonds can still be adequately serviced under ‘AAA’ high-stress default scenarios, with support from available funds in the Collection Account which will more than cover the scheduled redemption of RM290.0 million of Series 3 bonds maturing on October 20, 2011. The analysis has also considered low and high prepayment scenarios, within which the mortgage pool’s cumulative prepayment rate of 17.09% falls. Cagamas MBS may exercise the option to partially redeem Series 4 of CMBS 2004-1 on the next scheduled redemption date on the condition that RM66 million remains in the Collection Account post redemption.

MARC’s stable outlook for CMBS 2004-1 is premised on the stable performance of the transaction’s collateral pool and its high collateralisation ratio which allows the bonds to withstand a large increase in mortgage defaults and loss rates. MARC considers the risk of shortfalls arising from unexpectedly high prepayments to be well mitigated by CMBS 2004-1’s sizeable accumulated liquidity reserves.

www.marc.com.my

BPAM: The Bond Index Monthly Report for May 2011 is now available.

These reports give an instant snapshot on the performance of our key bond indices in an easy-to-read and understand format. These reports are also accessible on our Commentary & Research pages under "BPAM Research -> BPAM Bond Index Reports"

www.bpam.com.my

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