RAM Ratings reaffirms TTPC’s debt rating

Published on 27 June 2011

RAM Ratings has reaffirmed the AA1 rating of Teknologi Tenaga Perlis Consortium Sdn Bhd’s (TTPC or the Company) RM1,515 million Al-Istisna’ Fixed-Rate Serial Bonds (2001/2016) (the Bonds), with a stable outlook. TTPC is an independent power producer (IPP) that owns and operates a 650-MW natural gas-fired, combined-cycle power plant (the Plant) in Kuala Sungai Baru, Perlis.

The rating remains supported by TTPC’s sound business profile, underscored by the favourable terms of its Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB). Under the terms of the PPA, TTPC is entitled to earn full available capacity payments (ACPs) irrespective of the quantum of electricity generated - subject to meeting certain performance requirements. In addition, the IPP is allowed to fully pass through its fuel costs to TNB based on the formula for energy payments (EPs) in the PPA, so long as the Plant operates within the allowable heat-rate requirements. TTPC’s rating is also driven by its commendable operating performance to date. Since commissioning, the Plant has been meeting all the performance requirements under the PPA to earn full ACPs, and has been able to fully pass through its fuel costs each year.

Despite having repaid RM115 million of the Bonds’ principal and distributing RM80 million of dividends to its shareholders, TTPC’s finance service cover ratio (FSCR) remained intact at 2.15 times (with cash balances, post-distribution) in FYE 30 September 2010 (FY Sep 2010). Looking ahead, TTPC is projected to maintain its strong debt-servicing ability, with an average annual pre-financing cashflow of approximately RM220 million. This translates into a projected FSCR of at least 1.41 times (with cash balances, post-distribution) on its principal repayment dates throughout the remaining tenure of the Bonds. RAM Ratings’ cashflow analysis assumes that TTPC would pay optimum dividends to its shareholders - pursuant to a shareholders’ agreement on 23 May 2008 - while adhering to its financial covenants throughout the Bonds’ tenure (i.e. on a forward-looking basis, as opposed to only the year of assessment). Such covenants include a post-distribution FSCR of at least 1.4 times, the requirement to maintain a balance in the finance service reserve account that is equivalent to its total obligations due on the next maturity date, and ensuring that its debt-to-equity ratio does not exceed 80:20.

In the meantime, the rating remains moderated by TTPC’s exposure to regulatory and single-project risks, similar to all other IPPs.

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

RAM Ratings reaffirms EON Bank's A1/P1 ratings, maintains Rating Watch with positive outlook

Published on 27 June 2011
RAM Ratings has reaffirmed EON Bank Berhad’s (EON Bank or the Group) long- and short-term financial institution ratings at A1 and P1, respectively. At the same time, the ratings of its Innovative Tier-1 Capital Securities Issuance Programme of up to RM1 billion and Subordinated Medium-Term Notes (MTN) Issuance Programme of up to RM2 billion have been reaffirmed at a respective A3 and A2. We have maintained the positive Rating Watch on all the long-term ratings.

Hong Leong Bank Berhad (Hong Leong Bank) completed the acquisition of assets and liabilities of EON Bank’s parent company – EON Capital Berhad (EON Capital) – on 6 May 2011. All the assets and liabilities of EON Bank are targeted to be novated to Hong Leong Bank by 1 July 2011. The positive Rating Watch is underpinned by the imminent rating upgrade for EON Bank’s debt facilities upon the transfer of its assets and liabilities to Hong Leong Bank pursuant to a Vesting Order from the High Court, to mirror the credit standing of the obligor of its debt facilities, i.e. Hong Leong Bank. The financial institution ratings of EON Bank will likely be withdrawn. RAM Ratings reaffirmed Hong Leong Bank’s AA1/P1 financial institutions ratings on 29 April 2011, with a stable outlook.

The reaffirmation of EON Bank’s ratings is premised on the Group’s sound franchise in vehicle financing, with a market share of 9.0% as at end-December 2010. EON Bank’s healthy asset quality is reflected in its gross impaired-loan ratio of 3.6% as at the same date; its loan-loss reserve coverage over gross impaired loans improved from 83.0% to 89.6% over the same period. Mainly supported by stronger net interest income, EON Bank’s respective return on assets and return on equity were lifted to 1.1% and 14.1% as at end-December 2010 (end-December 2009: 1.0% and 11.9%). With loan-to-deposit ratio of 88.4% and liquid asset ratio of 31.9% as at the same date, the Group is deemed to have a healthy liquidity and funding position. In terms of capitalisation, EON Bank’s overall risk-weighted capital-adequacy ratio (RWCAR) and tier-1 RWCAR remained sound at a respective 15.4% and 10.9%.

Post-merger, EON Capital and Hong Leong Bank (the Merged Entity) will become the fourth-largest banking group in Malaysia, with about RM140 billion of assets. The Merged Entity’s market shares of the industry’s loans and deposits are estimated at 9.0% and 9.9%, respectively. Given the more balanced loan mix and higher penetration rates, particularly in retail lending, the Merged Entity is envisaged to have a better competitive position than its larger peers. Benefiting from Hong Leong Bank’s traditionally robust risk management processes and sound funding profile, the Merged Entity is expected to enjoy healthy credit metrics. Nevertheless, RAM Ratings is mindful of potential near-term integration issues along with a typical 2- to 3-year gestation period before the advantages of the merger can materialise.

RAM Ratings' Rating Watch highlights a possible change in an existing rating. It focuses on identifiable events such as mergers, acquisitions, regulatory changes and operational developments that place a rating under special surveillance by RAM Ratings. In a broader sense, it covers any event that may result in changes in the risk factors relating to the repayment of principal and interest.

Ratings will appear on RAM Ratings' Rating Watch when some of the above events are expected to or have occurred. Appearance on RAM Ratings' Rating Watch, however, does not inevitably mean that the existing rating will be changed. It only means that a rating is under evaluation by RAM Ratings and a final affirmation is expected to be announced. A "positive" outlook indicates that a rating may be raised while a "negative" outlook indicates that a rating may be lowered. A “developing” outlook refers to those unusual situations in which future events are so unclear that the rating may potentially be raised or lowered.

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my

RAM Ratings assigns AA1 rating to Sarawak Energy’s proposed RM15 billion sukuk

Published on 23 June 2011

RAM Ratings has assigned a long-term rating of AA1 (with a stable outlook) to Sarawak Energy Berhad's ("SEB" or "the Group") proposed Sukuk Musyarakah Programme of up to RM15 billion ("Sukuk"). SEB is the Sarawak State Government’s (“the State”) wholly owned, vertically integrated electricity group with a monopoly over the generation, transmission and distribution of electricity in Sarawak. The rating is premised on this integral role and the strong support from both the State and Federal Governments. These strengths are however, moderated by demand risk arising in relation to the sizeable new generating capacity on the horizon and its expected impact on SEB’s financial profile.

The Group has emerged as a key facilitator of the State and Federal Governments’ plans to tap Sarawak’s vast energy resources via the development of the Sarawak Corridor of Renewable Energy (“SCORE”). In fulfilling these aspirations, SEB’s generating capacity is set to triple within a relatively short time, with Sarawak’s electricity reserve margin expected to peak at 150% by 2012 (2010: 13%).

Naturally, demand risk will feature more prominently in our assessment of the Group’s credit profile, along with concentration risk arising from the relatively larger industrial off-takers that will establish operations in the SCORE. Nonetheless, these risks are moderated to some extent by the respective take-or-pay power purchase agreements that will be in place and the Group’s diverse customer profile. SEB has to date secured buyers for roughly half of the new 3,011 MW of capacity coming on-stream by 2015. In the meantime, the remaining capacity is expected to be taken up by additional off-takers that are in negotiations with SEB.

To keep pace with the State’s new-found energy needs under the SCORE, the Group’s debt load is projected to increase from RM2.51 billion as at end-December 2010 to RM16.69 billion by end-December 2013, at which point its gearing level is envisaged to peak at 4.27 times. In line with the expected lengthy gestation period for such endeavours, this will mark the beginning of a phase of weak financials, during which SEB’s funds from operations debt coverage is anticipated to drop from 0.30 times as at end-2010 to a mere 0.06 times over the next few years.

Meanwhile, SEB maintains its close links with the State; as a unit directly under the purview of the State Financial Secretary, it enjoys strong implicit support from the State, which determines its strategic direction, board of directors and key management. Heavily subsidised natural gas from Petroliam Nasional Berhad is also made available to the Group. RAM Ratings believes that there is great incentive for financial assistance to be provided, if necessary, because SEB’s failure to meet its financial and operational obligations would severely undermine the SCORE’s success.

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

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

RAM Ratings assigns A2/P1 ratings to Pac Lease's proposed CP/MTN programme of up to RM500 million

Published on 21 June 2011
RAM Ratings has assigned respective long- and short-term ratings of A2 and P1 to Pac Lease Berhad’s (PacLease or the Company) Proposed Commercial Papers/Medium-Term Notes Issuance Programme (CP/MTN Programme) of up to RM500 million. Concurrently, RAM Ratings has reaffirmed the respective long- and short-term ratings of the Company’s RM200 million CP/MTN Programme, at A2 and P1. Both long-term ratings have a stable outlook. The ratings are premised on PacLease’s healthy asset-quality indicators and the strong support from its ultimate major shareholder, Oversea-Chinese Banking Corporation Limited (OCBC Singapore). The ratings also take into consideration the Company’s newly acquired loan portfolio arising from business expansion which has not been fully seasoned, as well as the fragmented and competitive nature of the hire-purchase (HP)/ leasing industry.

PacLease is a wholly owned subsidiary of PacificMas Berhad (PacificMas), which in turn is ultimately owned by OCBC Singapore; the latter influences the strategic direction of PacLease. In FYE 31 December 2010 (FY Dec 2010), PacLease achieved a 54% growth in its gross receivables, on the heels of a 36% increase in FY Dec 2009. In a bid to achieve critical mass and generate higher returns on equity, PacLease intends to expand its receivables base to RM1.3 billion by 2014 (end-December 2010: RM553.9 million). As part of its growth strategy, the Company seeks to expand its receivables base beyond its traditional HP and leasing activities.

PacLease’s outstanding gross impaired loans had increased to RM7.6 million as at end-December 2010 (end-December 2009: RM5.0 million) – mainly attributable to additional newly impaired loans during the year. Given its enlarged loan base, however, the Company’s gross and net impaired-loan ratios remained unchanged at a respective 1.4% and 0.3%. Given the management’s proactive approach to provisioning, the Company’s loan-loss reserve coverage stood at a strong 147.1% as at end-December 2010. Overall, PacLease’s asset-quality indicators are deemed healthy, notwithstanding its recent rapid expansion.

Supported by stronger net interest income from its credit expansion and more robust non-interest income, PacLease’s returns on assets and equity improved to 3.0% and 11.6%, respectively, as at end-FY Dec 2010 (end-FY Dec 2009: 2.2% and 8.6%). Despite heftier borrowings, its gearing ratio only edged up to 3.0 times as at the same date (end-December 2009: 2.7 times), due to a RM35 million capital injection from PacificMas and the retention of all earnings for FY Dec 2010. Looking ahead, PacLease’s gearing ratio is likely to rise in tandem with its planned business expansion, although further capital infusions from its parent are expected to moderate the uptrend. Meanwhile, its interest-servicing ability is deemed healthy, with an interest coverage of 2.2 times as at end-December 2010 (end-December 2009: 2.1 times).

Media contact
Amy Lo
(603) 7628 1078
amy@ram.com.my

MARC ASSIGNS AAAID(fg) RATING TO ANTARA STEEL MILLS SDN BHD’S PROPOSED RM300 MILLION GIS; AFFIRMS AID RATING ON RM500 MILLION BaIDS

Jun 22, 2011 -

MARC has assigned a rating of AAAID(fg) to Antara Steel Mill Sdn Bhd’s (Antara) RM300 million Guaranteed Islamic Securities (GIS) programme with a stable outlook. The RM300 million GIS programme is guaranteed by Danajamin Nasional Bhd (Danajamin). At the same time, MARC has affirmed its rating of AID on Antara’s existing RM500 million Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) while revising the rating outlook to stable from positive to reflect Antara’s moderating financial performance in recent quarters.

The rating on the GIS programme is premised on MARC’s current rating of Danajamin’s financial strength at AAA/stable based on its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base supported by ample liquidity and a conservative investment policy. The rating on the BaIDs reflects Antara’s strong domestic market position in the steel sector, its stronger credit metrics relative to its peers in the industry and the sensitivity of steel demand to worldwide general economic conditions. The impact of the recent earthquake and tsunami on the world’s second largest producer of steel, Japan, could lift steel prices in Asia higher due to the fall in production capacity caused by damage to key steel mills. Adding to steel price volatility is the recent surge in the cost of iron ore and coking coal and the cyclical demand from steel-consuming industries.

Antara’s steel operations are carried out at its Labuan plant which produces hot-briquetted iron (HBI), a form of scrap substitute used in the manufacture of high grade steel, and its Pasir Gudang plant which produces semi-finished and finished steel products such as billets and bars. MARC notes that the more profitable operations of Antara’s Labuan plant have historically compensated for the weaker performance of its ageing Pasir Gudang plant and is expected to continue do so in the near to medium term. For the first six months ended December 31, 2010 (1HFY2011), the Labuan plant registered an operating profit margin of 9.9% (1HFY2010: 18.8%) as opposed to a negative operating margin of 5.7% (1HFY2010: -1.0%) for its Pasir Gudang plant (bars and billets). In common with its domestic peers in the industry, Antara’s business continues to be subject to cyclical demand and volatility in iron ore prices which have negatively impacted its performance in 1HFY2011 compared to its full-year FY2010 performance. Operating profit declined to RM21.2 million in 1HFY2011 (1HFY2010: RM66.1million), also as a result of higher repairs and maintenance costs, in particular for its Pasir Gudang plant which registered a lower-than average utilisation rate of 47% compared to 60% in FY2010.

Antara’s financial performance had benefited from the lower raw material costs charged to cost of sales arising from a RM201.8 million inventory write-down in the previous financial year. Antara uses the weighted average inventory costing method. The improved performance was also supported by higher output for all products as well as higher average selling price for bars, which translated to strong cash flow from operations (CFO) of RM207.07 million (FY2009: RM242.08 million). Meanwhile, CFO interest and debt coverage ratios also improved as a result of reduced debt following a RM110.0 million BaIDs repayment in August 2009. With a further redemption of RM110 million in August 2010, Antara’s debt-to-equity ratio improved to 0.15 times as at December 31, 2010. MARC notes that unlike many of its domestic peers, Antara is not burdened with substantial debt. Upon the issuance of the RM300.0 million under the GIS programme and additional RM100.0 million of financing for working capital, Antara’s pro-forma D/E ratio would be increased to a still satisfactory 0.46 times.

MARC views Antara’s liquidity position as adequate relative to its near - to medium - term needs, taking into account its relatively strong cash flow generation ability and proceeds from its GIS issuance. Part of the proceeds from the new issue will be used for the final redemption of its outstanding BaIDS of RM130.0 million due in August 2011. The balance of the proceeds would be largely used to finance working capital needs. MARC believes that rising raw material prices will result in higher working capital requirements. MARC anticipates some near-term moderation of Antara’s cash flow coverage measures as a result of the additional debt taken to fund its working capital needs.

Noteholders are insulated from the downside risks in relation to Antara’s credit profile by virtue of the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook will be primarily driven by changes in Danajamin’s credit strength.

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

RAM Ratings reaffirms ratings of RH Capital's Islamic debt securities

Published on 22 June 2011
RAM Ratings has reaffirmed the ratings of RH Capital Sdn Bhd’s (RH Capital or the Issuer) RM135 million Sukuk Ijarah (Sukuk Ijarah) and Sukuk Ijarah Commercial Paper/Medium-Term Notes (CP/MTN) Programme (collectively, “the Islamic Securities”); all the long-term ratings have a stable outlook. The stable rating outlook represents our expectation that the lessees (or the operators of the transaction’s assets) will be able to meet their scheduled Ijarah payments and, in turn, the payment obligations under the Islamic Securities throughout their remaining tenures.

The reaffirmation of the respective AAA, AA2 and A2 ratings of the Class A, Class B and Class C Sukuk Ijarah is premised on the transaction’s structural features and the cashflow stemming from the plantations, which is expected to average at around RM10 million per annum – in line with our sustainable cashflow projections. Together with the oil mills, the resultant adjusted valuations, loan-to-value (LTV) ratios and debt service cover ratios (DSCRs) remain commensurate with the ratings. To date, the lessees have performed their Ijarah obligations on a timely basis; this includes the most recent RM15 million principal redemption of the Class C Sukuk Ijarah in December 2010.

Meanwhile, the AAA(s)/P1(s) ratings of the Sukuk Ijarah CP/MTN Programme reflect the enhancement provided by the Sukuk Put Option, granted by OCBC Bank (Malaysia) Berhad (OCBC Malaysia) to the Sukuk holders. RAM Ratings reaffirmed OCBC Malaysia’s AAA/P1 financial institution ratings, with a stable outlook, on 27 October 2010.

Due to the lagged weather effects from El Nino in early 2010 and La Nina towards the end of last year that had hampered harvesting activities, the 3 estates’ average yields of fresh fruit bunches (FFB) declined slightly to 11.4 metric tonnes per matured hectare (MT/ha) in 2010 (2009: 12.3 MT/ha); this pattern emulated the year-on-year (y-o-y) performance at state level. Concurrently, the 3 estates’ FFB yields remained below Sarawak’s average of 14.9 MT/ha. Despite that, the cashflow generated by the estates had strengthened y-o-y because of higher FFB selling prices.

While the management had made some efforts - such as hiring more experienced and qualified estate managers and improving infrastructure - we expect a period of gestation before any significant progress in FFB yields, particularly given the 3 estates’ relatively young trees. Notably, 30% of their palms fall into the “immature” bucket while the remainder are generally young palms that produce relatively lesser yields compared to those in the prime bucket. Furthermore, the plantations’ performance remains challenged by erratic weather patterns. That said, there are signs of recovery from tree stress after the bumper crop in 2008; the industry is expected to experience the next cycle of strong production within the next 2 years.

Overall, the palm-oil mills of RH Selangau and RH Lundu exhibited a stable oil-extraction rate (OER) of 20.2% in 2010 (2009: 20.7%). At the same time, the mills’ kernel-extraction rate (KER) slipped slightly to 3.9% (2009: 4.2%), mainly due to smaller kernels from the younger palms. Underpinned by firm prices for crude palm oil (CPO) and more robust CPO output (+12.5% y-o-y), the lessees’ overall net operating cashflow augmented from RM27.0 million to RM42.1 million y-o-y. Going forward, we envisage the lessees’ performance to continue to be affected by CPO price movements. Nonetheless, we also derive comfort from Tiong Toh Siong Sdn Bhd’s – the parent company of RH Capital and the lessees – undertaking to meet the debt obligations under the Islamic Securities, if and when required.

Media contact
Tan Han Nee
603 – 7628 1023
hannee@ram.com.my

RAM Ratings reaffirms AAA(bg)/P1(bg) ratings of E&O Property Penang's debt facility

Published on 21 June 2011

RAM Ratings has reaffirmed the enhanced AAA(bg)/P1(bg) ratings of E&O Property (Penang) Sdn Bhd’s (EOPP or the Company) RM350 million Bank-Guaranteed Commercial Papers/Medium-Term Notes Programme (CP/MTN); the long-term rating has a stable outlook. The enhanced long-term rating reflects the unconditional and irrevocable bank guarantee extended by Malayan Banking Berhad (Maybank) (rated AAA/Stable/P1 by RAM Ratings) while the enhanced short-term rating reflects the unconditional and irrevocable bank guarantee extended by Maybank and Affin Bank Berhad (rated A1/Stable/P1 by RAM Ratings). The backing of the bank guarantee enhances the credit profile of the CP/MTN beyond EOPP’s stand-alone credit standing.

EOPP is the developer of Phase 1 of the Seri Tanjung Pinang project (the Project) - a mixed development spanning 240 acres of reclaimed land in Tanjung Tokong, Penang, with a gross development value of approximately RM3.6 billion. EOPP is 95.6%-held by E&O Property Development Berhad, which is in turn a wholly owned subsidiary of Bursa listed Eastern & Oriental Berhad (E&O Berhad or the Group). As at 8 February 2011, EOPP had sold more than RM1.36 billion of properties since its maiden launch in October 2005; about RM332.06 million remained unbilled.

Excluding the bank guarantee, EOPP’s credit fundamentals are supported by its parent’s established track record and strong branding. This, coupled with the Project’s mature status and its strategic location i.e. close proximity to Gurney Drive are expected to augur well for EOPP. As EOPP is an integral part of the Group, we believe it will continue to enjoy strong parental support. These factors are balanced against the Company’s single-project risk and heavy debt load against the backdrop of intense competitive pressures.

Media contact
Jeremy de Silva
(603) 7628 1031
jeremy@ram.com.my

Recent news on petroleum hub project has no rating impact on Muhibbah’s Islamic Bonds

Published on 20 June 2011

RAM Ratings views the recent news on the receivership status of the owner of the petroleum hub project at Tanjung Bin, Johor (APH project), to have no rating impact on Muhibbah Engineering (M) Bhd’s (Muhibbah or the Group) RM130 million Islamic Bonds. Muhibbah is one of the contractors for the APH project.

Muhibbah’s Islamic Bonds carry a AAA(s) rating with a stable outlook, supported by the irrevocable and unconditional guarantee from Malayan Banking Berhad (Maybank) to honour Muhibbah’s irrevocable and unconditional undertaking to purchase and cancel all the Islamic Bonds at the exercise price upon the declaration of an event of default (Purchase Undertaking). The Trustee, on behalf of the bondholders, will be able to call on the bank guarantee to honour Muhibbah’s Purchase Undertaking. The guarantee from Maybank enhances the credit profile of the Islamic Bonds beyond Muhibbah’s inherent or stand-alone credit standing.

It was reported that the financier of the APH project, CIMB Bank Berhad, has appointed a receiver and manager for the developer and operator of the APH project. The outstanding amount owed to Muhibbah for certified works done on the project and related costs stood at RM370.8 million as at 31 December 2010.

As it is, the Group’s stand-alone credit profile has been affected by its weaker-than-expected profit performance, balance sheet and debt coverage ratios, as well as its tight liquidity profile. The Group also faces collection issues, including the large aforementioned receivable for the APH project. The project was halted in FY Dec 2009 partly due to the spike in raw material prices in 2008 which led to a ballooning of the project cost. It was reported that the project owner is currently negotiating with a new investor to bring in funds to resuscitate and complete the project, including making due payments to contractors. Nevertheless, negotiations had been rather protracted, and we view that it is unlikely for Muhibbah to collect the amount owed in the near term.

Nevertheless, RAM Ratings notes that Muhibbah has an established track record within the construction industry, specialising in oil-and-gas-related jobs, marine-engineering and civil-engineering jobs. Muhibbah’s outstanding order book of RM2.9 billion as at 19 May 2011 will sustain the Group over the next 2 years. Muhibbah also derives earnings diversity, from its involvement in the construction, cranes and shipyard segments. It also enjoys recurring dividend income from its associate stakes in the concessionaire for road-maintenance work in Malaysia and an operator and concession holder for 3 international airports in Cambodia.

Media contact
Karin Koh
(603) 7628 1174
karin@ram.com.my

RAM Ratings reaffirms Seafield Capital’s sukuk rating at AA2

Published on 17 June 2011

RAM Ratings has reaffirmed the AA2 rating of Seafield Capital Berhad’s (Seafield Capital) RM1.5 billion Sukuk Musharakah Programme (2009/2029) (the Sukuk), the rating has a stable outlook. Our analysis is based on the assumption that up to RM1.1 billion will be drawn down under the Sukuk. We highlight that the aggregate nominal value of the Issuer’s indebtedness can only exceed the aggregate principal amount of RM1.1 billion if it does not result in a rating downgrade for any outstanding Sukuk. Notably, Seafield Capital has to date drawn down RM950 million of the Sukuk.

Seafield Capital is a trust-owned, special-purpose company through which Expressway Lingkaran Tengah Sdn Bhd (ELITE) issued the Sukuk to meet the Company’s funding requirements. ELITE is the concessionaire for the 63-km North-South Expressway Central Link, the Kuala Lumpur International Airport (KLIA) Extension Link and the Putrajaya Link (collectively referred to as “the Expressways”).

Under the transaction structure, the Sukuk holders’ recourse to ELITE is recognised via an irrevocable and unconditional Purchase Undertaking Deed between Seafield Capital and ELITE. Through this document, ELITE (as the obligor) will undertake to purchase the trust assets from Seafield Capital upon the occurrence of certain events, at a price equal to the Exercise Price. Given the strong credit link between these parties, RAM Ratings views them in aggregate from a credit perspective. The rating of the Sukuk is, therefore, a reflection of ELITE’s credit risk.

The rating is supported by ELITE’s strong business profile underscored by the Expressways’ strategic alignment as the primary link between the New Klang Valley Expressway (at Shah Alam) and KLIA to the North-South Expressway (NSE) (at the Nilai Interchange). In 2010, traffic volume leaped 11.36% year-on-year (y-o-y) to 1,605.27 million passenger car unit kilometre (PCU-km) (2009: 1,441.52 million PCU-km). The up-tick in traffic volume continued to be supported by flow-through traffic from the NSE, which accounted for 42% of the total traffic plying the Expressways; traffic on the NSE increased 7.68% (y-o-y) in 2010.

The excellent operating track record of the Expressways is expected to translate into strong cashflow generation. Based on RAM Ratings’ analysis, ELITE is expected to maintain its commendable debt-servicing aptitude with a robust projected minimum finance service cover ratio (FSCR) on principal repayment date (with cash balances, post-distribution) of 2.03 times, this is based the maturity profile of the outstanding Sukuk of RM950 million. In assessing ELITE’s annual distributions to its shareholders, RAM Ratings’ cashflow analysis assumes ELITE will adhere to its financial covenants throughout the tenure of the Sukuk (i.e. on a forward looking basis as opposed to the year of assessment only). Such financial covenants include compliance with the Finance Service Reserve Account and Government Loan Service Reserve Account requirements as well as the post-distribution FSCR of 2 times.

Meanwhile, the rating is moderated by the uncertainty of ELITE’s financial profile given that the transaction features of the Sukuk affords Seafield Capital the flexibility of issuing additional Sukuk and incurring other borrowings (which in aggregate shall not exceed the principal amount of RM1.5 billion and is subjected to a reduction schedule). This is unlike other typical project-financed structures where the level, terms and repayment profile of debt is fixed at the outset. At the same time, the rating also remains moderated by regulatory and single-project risks.

Media contact
Lee Chai Len
(603) 7628 1192
chailen@ram.com.my

MARC REVISES RATING OUTLOOK ON SIME DARBY BERHAD’S ISLAMIC DEBT FACILITIES TO STABLE

Jun 17, 2011 -

MARC has revised its outlook on Sime Darby Berhad's (Sime) MARC-1ID /AAAID debt ratings to stable from negative. The outlook revision affects the following facilities of Sime:

1) RM4.5 billion Islamic Medium Term Note (IMTN) Programme (RM2.0 billion outstanding) and RM500 million Islamic Commercial Paper (ICP) Programme (RM500 million outstanding) with combined limit of RM4.5 billion; and

2) RM150 million Underwritten Murabahah Commercial Papers Facility.

The outlook revision reflects abating downside risks to Sime's consolidated credit profile from projects of its Energy & Utilities (E&U) division. The E&U division's EBIT of RM219.5 million for the nine months to March 31, 2011 (9MFY2011) marks a turnaround from the RM1,019.3 million loss for the prior year corresponding period.

The progress made on E&U division's problem projects since the rating agency's last rating action in October 2010 has alleviated MARC's major concerns about project execution risk and the potential for additional losses. MARC notes a RM98.5 million write-back of provisions for E&U division's Maersk Oil Qatar project in the third quarter of FY2011 following project close-out. Meanwhile, its Qatar Petroleum project (in respect of which a RM200 million provision has been made in 3QFY2010) has moved into the close-out phase. The Bakun dam project in which Sime is the lead consortium member with a 35.7% interest is scheduled for handover end-2011 while completion of India-based ONGC project is targeted by June 2012. Provisions of RM450 million made for the Bakun dam project and RM227 million for the ONGC project are expected to provide adequate buffer for actual cost overruns.

Sime recently announced that it would be exiting from oilfield services by divesting Sime Darby Engineering Sdn Bhd's (SDE) oil and gas assets for a provisional cash consideration of RM695 million. Non-binding memoranda of understanding (MOUs) for the disposals of its Teluk Ramunia and Pasir Gudang fabrication yards have been signed with national oil company Petroliam Nasional Berhad (Petronas) and Malaysia Marine and Heavy Engineering Holdings Berhad (MHB) respectively, for this purpose. MARC views the divestments as positive for Sime's consolidated credit profile in light of the operational challenges of its oilfield services business and huge prior year losses. The disposal of the oil and gas assets will allow Sime to focus on its core plantation, property, automotive and industrial businesses, and show improvement in its consolidated profitability. MARC understands that Sime would still have to complete its outstanding contractual obligations notwithstanding the divestments.

For the nine to March 31, 2011, Sime reported a doubling of consolidated pre-tax profit to RM3.4 billion (9MFY2010: RM1.7 billion) on consolidated revenue of RM29.7 billion (9MFY2010: RM23.7 billion). The group saw higher contributions from its plantation, industrial and motor divisions which reported increases of 18%, 30% and 90% respectively in EBIT. Its EBITDA interest coverage also strengthened to 17.4 times (9MFY2010: 14.3 times). Sime's consolidated liquidity remains strong with cash and cash equivalents of RM4.1 billion (FY2010: RM4.4 billion) as of March 31, 2011 against short-term borrowings of RM3.2 billion (FY2010: RM3.3 billion).

In light of the above developments, MARC considers Sime's credit metrics to be sufficiently restored and commensurate with its long-term rating of AAA. Further factored into the stable outlook is Sime's strong commitment to preserve its current ratings.

Contacts:

Benjamin Yab, 03-2082 2270/ benjaminyab@marc.com.my;
Rajan Paramesran, 03-2082 2233/ rajan@marc.com.my.