RAM Ratings reaffirms Public Bank’s AAA/P1 financial institution ratings

Published on 05 June 2012

RAM Ratings has reaffirmed Public Bank Berhad’s (Public Bank or the Group) long- and short-term financial institution ratings, at AAA and P1, respectively. The long-term rating carries a stable outlook. The reaffirmation is premised on Public Bank’s robust financial profile and reputable franchise in the domestic market, underscored by its superior asset quality and commendable profit track record.

Public Bank’s asset quality has remained among the industry’s best, bearing testimony to the Group’s prudent credit culture and stringent underwriting standards. As at end-March 2012, the Group’s gross impaired-loan ratio stood at a commendable 0.8%. Meanwhile, despite the keenly competitive business environment, Public Bank has been able to maintain an excellent profit track record. The Group’s pre-tax profit of RM4.6 billion for FYE 31 December 2011 (FY Dec 2011) translated into respective returns on equity and returns on assets of 31.5% and 1.9% (FY Dec 2010: 32.2% and 1.8%).

Public Bank has been benefiting from a lower collective assessment rate of 0.8% following the full adoption of MFRS 139 on 1 January 2012. This has resulted in RM859 million of write-backs on excess collective assessment to retained earnings, which boosted the Group’s common equity tier-1 (CET1) ratio to 7.8%. Although this is above the recommended CET1 plus a conservation buffer of 7% under Basel III, it is still at the lower end of the scale compared to the Group’s peers in the domestic banking industry. This is reflective of Public Bank’s generous dividend-payout policy. That said, the Group’s lower CET1 ratio is balanced by its excellent asset quality and commendable profit track record. As at end-March 2012, the Group’s tier-1 and overall risk-weighted capital-adequacy ratios stood at a respective 10.3% and 14.4%.

At the same time, the respective long-term ratings of Public Bank’s Subordinated Medium-Term Notes (MTN) under its up to RM5 billion Subordinated MTN Programme, RM1.2 billion Innovative Tier-1 Capital Securities and up to RM5 billion Non-Cumulative Perpetual Capital Securities under the Non-Innovative Tier-1 Stapled Securities Programme have also been reaffirmed at AA1, AA2 and AA2. All the long-term ratings have a stable outlook.

Media contact
Chan Yin Huei
(603) 7628 1180
yinhuei@ram.com.my

RAM Ratings reaffirms Bank Muamalat’s A2/P1 financial institution ratings and A3 subordinated sukuk rating

Published on 05 June 2012

RAM Ratings has reaffirmed Bank Muamalat Malaysia Berhad’s (“Bank Muamalat” or “the Bank”) respective long- and short-term financial institution ratings at A2 and P1. Concurrently, the rating of the Bank’s RM400 million Islamic Subordinated Sukuk Programme (2011/2026) (“Subordinated Sukuk”) has also been reaffirmed at A3. Both the long-term ratings have a stable outlook. The 1-notch difference between Bank Muamalat’s A2 long-term financial institution rating and the A3 rating of its Subordinated Sukuk reflects the subordination of the debt facility to the Bank’s senior unsecured obligations.

Bank Muamalat, a full-fledged Islamic financial institution, is currently owned by DRB-HICOM Berhad (70%) and Khazanah Nasional Berhad (30%). Notably, its asset-quality indicators have been improving since the implementation of a more rigorous risk-management framework by the then-new management team in 2009. Nevertheless, delinquencies from credits originated prior to that are still surfacing, although less frequently. This was the case as at end-March 2012, when the value of the Bank’s gross impaired financing (“GIF”) increased RM68 million to RM446.3 million from RM378.3 million as at end-March 2011, primarily due to 2 lumpy defaulted construction accounts. However, a larger financing base following its 26% financing growth in FYE 31 March 2012 (“FY Mar 2012”) kept its GIF ratio at 4.7% at the end of the period (banking system: 2.5%).

In FY Mar 2012, Bank Muamalat recorded a 39.2% lower pre-tax profit of RM124.1 million, mainly due to heftier overheads and a compressed net financing margin. While exposures to certain private debt securities may also require additional impairment charges in the future, we acknowledge Bank Muamalat’s robust capitalisation, which provides an ample buffer to absorb these potential losses; its overall risk-weighted capital-adequacy ratio stood at 19.7% as at end-March 2012. We note that the Bank’s high level of depositor-concentration risk is partly mitigated by its liquid balance sheet, as underlined by its high liquid-asset ratio of 45.8%.

Media contact
Cheong Kah Weng
(603) 7628 1113
kahweng@ram.com.my

MARC AFFIRMS ITS AAAID RATING ON CAGAMAS MBS BERHAD’S RM2,050 MILLION ASSET-BACKED SUKUK MUSYARAKAH ISSUANCE (CMBS 2005-1); OUTLOOK STABLE

May 31, 2012 -

MARC has affirmed the AAAID rating of Cagamas MBS Berhad’s (Cagamas MBS) asset-backed Sukuk Musyarakah issuance (CMBS 2005-1) of RM2,050.0 million with a stable outlook. The rating action affects the outstanding Sukuk of approximately RM1,585.0 million. CMBS 2005-1 is an Islamic issuance which represents the second residential home financing securitisation issuance by Cagamas MBS. The transaction’s affirmed rating reflects strong credit enhancement levels for the outstanding Sukuk based on a collections account balance of RM527.8 million and the outstanding principal of non-defaulted home financings of RM1,954.8 million. The ratings are also supported by the transaction’s stable collateral pool performance, the transaction’s structural features as well as 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, 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 Government Staff Islamic Home Financings (Portfolio 2005-1) on which monthly home financing instalments are made via direct salary/pension deductions. The GOM’s Housing Loans Division, or Bahagian Pinjaman Perumahan (BPP), is the servicer of Portfolio 2005-1.

Based on Cagamas’ quarterly servicer report for CMBS 2005-1 dated February 8, 2012 (the reporting date), Portfolio 2005-1’s balance registered at RM1,967.3 million, representing 33,691 fixed-rate home financing, each having an average size of RM58,392 and a weighted term to maturity of 14.2 years. Since MARC’s last review in May 2011, the transaction’s credit enhancement level had increased to 156.6% from 156.0% owing to the collateral pool’s strong performance. At the reporting date, the collateral pool’s cumulative default rate registered at 0.4% versus MARC’s expected cumulative default rate of 7.8%, while its cumulative prepayment rate was 7.4% and within MARC’s range of assumed prepayment rates. The transaction’s defaults were mainly attributable to data reconciliation lag and delay in salary and/or pension deductions as a result of changes in the employment status of borrowers.

MARC’s cash flow analysis demonstrates that the Sukuk can still be adequately serviced under ‘AAA’ high-stress default scenarios, with support from available funds in the Collection Account which are sufficient to cover the scheduled redemption of RM260.0 million of Tranche 3 Sukuk on August 8, 2012. The cash flow analysis also considers increases of 7% to 13% in civil servant salaries under the government’s improved Malaysian Remuneration System, effective from April 2012 onwards. MARC views the salary increases to be a positive factor for the collateral pool’s performance going forward in the context of home financing affordability and expects some increases in prepayments as well.

MARC’s stable outlook for CMBS 2005-1 is premised on the stable performance of the transaction’s collateral pool and its high collateralisation ratio, which allows the Sukuk to withstand a large increase in home financing defaults and loss rates. MARC considers the risk of shortfalls arising from unexpectedly high prepayments to be well mitigated by CMBS 2005-1’s sizeable accumulated liquidity reserves. Cagamas MBS may exercise the option to partially redeem the final tranche of CMBS 2005-1 on the next scheduled redemption date on the condition that RM66 million remains in the Collection Account post redemption.

Contacts:
Ruben Khoo, +603-2082 2265/ rubenkhoo@marc.com.my;
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my.

News Alert - June 7, 2012

. KLCI closes higher, stays shy of 1,570-mark
. China delays new, tougher capital rules to 2013
. Masterskill not for sale, says CEO
. SIA: Global semicon sales up 3.4% m-o-m in April to US$24.1b
. Bleak outlook in financial markets, eurozone may hit Felda IPO
. MISC 'not exiting' NCB Holdings
. MHB likely to secure Turkmenistan contract
. Masterskill diversifies to stem fall in earnings

RAM Ratings reaffirms AA2/P1 ratings of Lafarge Malayan Cement’s Islamic debt facility

Published on 31 May 2012

RAM Ratings has reaffirmed the respective long- and short-term ratings of Lafarge Malayan Cement Berhad’s (LMCB or the Group) RM350 million Islamic Securities Programme (2010/2017), at AA2 and P1; the long-term rating has a stable outlook.

The reaffirmation of the ratings is premised on LMCB’s strong business profile as the largest integrated cement player in Malaysia; the Group owns 4 cement plants and possesses almost half of the industry’s installed capacity. The availability of physical infrastructure as well as access to a global distribution network, via its parent, further provides LMCB with the flexibility to shift excess production to a larger market overseas. LMCB’s parent, Lafarge S.A., is the world’s largest cement producer. The Group’s financial profile remains superior as at end-2011, underlined by a conservative gearing ratio of less than 0.1 times and a superior funds from operations debt coverage ratio of 3.95 times. Its operating profit before depreciation, interest and tax margin continue to be healthy at above 20% for the same period.

LMCB remains exposed to volatile thermal coal prices as well as the cyclicality of the construction and property sectors. Price undercutting, which had occurred in the past, has been of a lesser issue in recent times. This said, RAM Ratings notes that the additional capacities that will be coming on-stream may pressure prices should there be insufficient demand. In the medium-term, demand for cement is expected to be supported by fiscal spending on the construction sector, generated by projects under Budget 2011, the Tenth Malaysia Plan and the Economic Transformation Programme.

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

MARC AFFIRMS AAAIS(fg) RATING ON 1 WARISAN SDN BHD’S RM170 MILLION IMTN PROGRAMME

May 30, 2012 -

MARC has affirmed its rating of AAAIS(fg) on 1 Warisan Sdn Bhd’s (1 Warisan) RM170.0 million seven-year Islamic Medium Term Notes (IMTN) Programme with a stable outlook. The affirmed rating and outlook are underpinned by an unconditional and irrevocable Kafalah Guarantee provided by Danajamin Nasional Berhad (Danajamin) in relation to the IMTN Programme. MARC currently rates Danajamin’s financial strength as AAA/stable on the basis of its important role as Malaysia’s first and sole financial guarantee insurer, its status as a government-sponsored entity, its solid capital base and ample liquidity.

Wholly-owned by Gema Padu Sdn Bhd, 1 Warisan was created as a funding vehicle to facilitate the issuance of the notes under the rated programme. As at February 27, 2012, RM100 million notes under the programme have been issued, though only RM53.9 million has been utilised so far with the balance retained in the disbursement account. The funds had been used to finance Gema Padu’s property development activities, including the redemption of some land parcels and three phases in its signature development, the 600-acre Kota Warisan township as well as two smaller adjacent property developments covering about 45 acres and nine acres respectively. All three developments benefit from close proximity to major highways and the Express Rail Link to Kuala Lumpur International Airport (KLIA).

MARC observes that since the initial rating exercise, Gema Padu has had only two launches, both of which were in respect of its smaller property developments. It achieved respective take-up rates of 94% and a moderate 60% for the launch of the 82 units of double-storey shop offices and one block of 245 units of service apartments with gross development value (GDV) of RM58.2 million and RM63.1 million respectively. MARC understands that Gema Padu’s development plans for the Kota Warisan development and 45-acre Damai Gemilang development have been changed. The group now intends to sell a major portion of the land held for future developments. To date, 12 acres from Damai Gemilang project have been sold for RM20.9 million (RM40 psf) and the group is negotiating to sell another 21 acres. Proceeds from the land parcel sales in Damai Gemilang project will be used to reduce Gema Padu’s borrowings including the RM10.5 million drawn down under the IMTN programme for the project. It will also dispose land parcels in Kota Warisan, which includes the 87 acres that were originally earmarked for residential and retail developments and financed under the IMTN programme. No drawdown from the disbursement account was made to fund development activities on Kota Warisan’s three projects. MARC is of the view that the company’s decision to monetise its land would help improve liquidity.

MARC understands that the construction progress of Gema Padu’s nine-acre Mutiara Warisan project is behind schedule by almost nine months due to delays in obtaining approvals from the local authorities, including for the revised building plan. The delays could give rise to liquidated damages.

Based on the unaudited nine-month period for financial year 2011 (9MFY2011), Gema Padu posted lower revenue of RM72.2 million (FY2010: RM83.3 million) and a sharply lower pre-tax profit of RM1.4 million (FY2010: RM12.1 million). Contribution from property development to revenue has continued to decline to 52% of total revenue for 9MFY2011 (FY2010: 58%; FY2009: 71%) on the back of fewer launches. Higher revenue from Gema Padu’s smaller business segments, including the low-margin retailing operations (fuel and groceries), machinery rentals and brick sales, have compensated somewhat for the lower property developments earnings. The lower-than-expected earnings and negative cash flow from operations in 9MFY2011 are partly due to the majority of its projects being at the early stages of development and consequently, face slower revenue recognition at these stages, in addition to rising costs.

Gema Padu’s stand-alone credit profile has been affected by its weak earnings in 9MFY2011 and negative operating cash flow of RM27.9 million. Its cash and cash equivalent holdings of RM37.1 million as at end-September 2011 was principally generated from borrowings. Its cash outflow from the acquisition of the developer’s nine-acre Mutiara Warisan development amounted to RM15.0 million, of which RM6.0 million was financed by the IMTN programme. As a result of the RM100 million drawdown under the rated programme, Gema Padu’s debt-to-equity ratio rose to 1.88 times. However, taking into account the undisbursed cash held in disbursement account, the net debt-to-equity ratio would be 1.34 times. The company met its April 2012 profit payment of RM2.08 million and intends to pare down its borrowings substantially in the subsequent months with proceeds from the land sales. MARC views the land sales as a critical driver for the maintenance of an adequate debt service capacity on the part of Gema Padu in coming months amid a challenging property market outlook.

Overall, noteholders under the IMTN programme are insulated from any downside risk in relation to Gema Padu’s credit profile by the guarantee provided by Danajamin. Any changes in the supported ratings or rating outlook would be primarily driven by changes in Danajamin’s credit strength.


Contacts:
Goh Shu Yuan, +603-2082 2268/ shuyuan@marc.com.my
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my

MARC UPLIFTS RATING SUSPENSION ON TRINITY CORPORATION BERHAD’S (FORMERLY KNOWN AS TALAM CORPORATION BERHAD) SETTLEMENT BaIDS, MAINTAINS B+ID RATING ON MARCWATCH NEGATIVE

May 25, 2012 -

MARC has lifted the suspension of its rating of B+ID on Trinity Corporation Berhad’s (Trinity) outstanding RM95.1 million Settlement Bithaman Ajil Debt Securities (Settlement BaIDS) and placed the rating on MARCWatch Negative.

Since MARC announced the suspension of Trinity’s rating on February 27, 2012, the rating agency has received pertinent information on Trinity from the company’s management to conduct surveillance on the rating. MARC has initiated its review of Trinity’s rating, which the rating agency has placed on MARCWatch Negative pending the outcome of wholly-owned subsidiary Ample Zone Sdn Bhd’s (Ample Zone) negotiations with its sukukholders.

Ample Zone had earlier defaulted on its principal repayment of RM84.65 million under its Sukuk Ijarah obligations but its sukukholders have not declared an event of default. The company is in negotiation with sukukholders for indulgence to be granted on the basis of meaningful progress being made to dispose properties encumbered to the issue. Notwithstanding the ongoing progress, should Ample Zone’s sukukholders declare an event of default, this would trigger a cross-default under Trinity’s Settlement BaIDS. Accordingly, the MARCWatch Negative placement on the rating principally reflects heightened default risk for Trinity as a result of cross-default provisions in outstanding sukuk and debt issues of Ample Zone and Trinity.

Since MARC’s December 6, 2010 rating announcement on Trinity, the rating agency notes that Trinity has continued to make progress in paying down its Settlement BaIDS with proceeds from asset disposals. The outstanding principal of the Settlement BaIDS has since reduced to RM95.1 million as of May 25, 2012. In addition, convertible securities outstanding declined from RM256.3 million as at end-FY2011 to RM80.1 million as at-end FY2012. As a result of the reduced outstanding Settlement BaIDS and convertible securities, the group’s debt-to-equity (DE) ratio declined to 0.77 times as at end-FY2012 from 1.17 times a year ago.

For the 12 months ended January 31, 2012 (FY2012), the group registered improved revenue of RM632.3 million (FY2011: RM183.4 million) mainly due to disposal of land parcels. Excluding this, Trinity’s revenue of RM286.7 million would mainly consist of progress billings from development activities, which rose to RM184.3 million in FY2012 (FY2011: RM77.5 million). Trinity narrowed its pre-tax loss to RM117.5 million, down from RM153.8 million in the previous year.

MARC expects the weak profitability profile of Trinity to continue in the near term; there is low visibility on future property development earnings against the gross development value of ongoing projects of about RM200.0 million. Trinity continues to face the challenge of generating sufficient cash flow to address its large remaining debt burden from timely asset disposals and its limited property development activities. To maintain an adequate financial profile for the rating category, Trinity will have to accelerate its asset disposal program to meet the group’s significant near-term obligations, with short-term borrowings of RM269.3 million as at January 31, 2012.

MARC will continue to monitor the progress of ongoing negotiations between Ample Zone and its sukukholders and take appropriate rating action where warranted. Should Ample Zone’s sukukholders consent to a maturity extension, MARC will likely remove its B+ID rating on Trinity’s Settlement BaIDS from the MARCWatch placement and affirm the rating with a stable outlook.

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

News Alert - June 5, 2012

. KLCI falls 1.17% as global markets slide
. China stocks fall bizarre 64.89 points on June 4,'89 anniversary
. Celcom posts RM514m PATAMI in 1Q 2012
. Matrade urges M'sian firms to vie for Chilean infrastructure jobs
. Ovum: Economic challenges giving rise to another wave of protectionism
. Fresh round of equities selling as jittery sentiment sends Asian markets into another tailspin
. YTL Comms and Asiaspace ink agreement to roll out mobile broadband services on 2.3GHz spectrum
. Sime, S P Setia, EPF in joint bid for Battersea power station
. Genting still eyes New York convention centre

MARC WITHDRAWS RATINGS ON PUTRAJAYA HOLDINGS SDN BHD’S RM1.5 BILLION MURABAHAH CP/MTN PROGRAMME

May 31, 2012 -

MARC has withdrawn its MARC-1ID/AAAID ratings on Putrajaya Holdings Sdn Bhd’s (PJH) RM1.5 billion Murabahah Commercial Papers/Medium Term Notes Programme with immediate effect following the cancellation of the programme as confirmed by its facility agent, AmInvestment Bank Berhad. There was no outstanding amount at the time of cancellation.

MARC’s analytical coverage on PJH is now limited to the following rated debt issuances:

RM570 million Bai Bithaman Ajil (BBA) Bonds Issuance Facility (due 2013) at AAAID
RM850 million BBA Bonds Issuance Facility (due 2013) at AAAID
RM850 million BBA Serial Bonds Issuance Facility (due 2015) at AAAID
RM1.5 billion Murabahah Notes Issuance Facility (MUNIF) (due 2015) at AAAID
RM2.2 billion Murabahah Medium Term Notes (MTN) Programme (due 2021) at AAAID
RM1.5 billion Sukuk Musyarakah MTN Programme (due 2033) at AAAIS
The rating outlook on these debt issuances is stable.

Contacts:
Thian Chow Di, +603-2082 2280/ chowdi@marc.com.my;
Nisha Fernandez, +603-2082 2269, nisha@marc.com.my.

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

Published on 31 May 2012

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 is backed by a full, unconditional and irrevocable corporate guarantee from F&N Holdings. As such, the enhanced ratings are based on the credit profile of F&N Holdings.

The ratings predominantly reflect F&N Holdings’ solid financial profile and strong leading positions in several food-and-beverage (“F&B”) segments. F&N Holdings remains a leader in the overall ready-to-drink market, despite the absence of The Coca-C ola Company (“TCCC”) brands from its portfolio after the expiry of its bottling contract with the former in September 2011. Likewise, the Group has retained its leadership in the Malaysian and Thai dairy-product markets. As some of its peers had been less affected by the Thai floods in October 2011, the Group is believed to have lost some market share during its plant closure – although post-flood market-share data has not been made available. Nonetheless, the facility has now returned to full capacity utilisation. As the dairy market in Thailand is still undersupplied, we expect the Group to regain its market share.

F&N Holdings’ financial profile has also stayed sturdy despite these setbacks, i.e. loss of contributions from TCCC products and the Thai floods, which had weakened its operational performance. “Such adversities had thinned its funds from operations (“FFO”) and necessitated a heavier debt load to fund its enlarged working capital and capital expenditure (“capex”) in the first half of FYE 30 September 2012 (“1H FY Sep 2012”). Nonetheless, its financial metrics had stayed favourable, with an annualised adjusted FFO debt cover of 0.85 times and an adjusted gearing ratio of 0.3 times,” notes Kevin Lim, RAM Ratings’ Head of Consumer & Industrial Ratings.

These strengths are, however, moderated by the more competitive F&B landscape. Apart from the emergence of TCCC as a competitor, the situation is exacerbated by the introduction of new TCCC products and those of other players. Likewise, competition has become increasingly keener in the dairy-products market amid the proliferation of value-for-money brands. Meanwhile, most of the small- and mid-sized manufacturers are still enjoying government subsidies on their sugar purchases, which render their products cheaper than those offered by F&N Holdings. This has compelled consumers to switch to these value-for-money brands, as reflected by the decline in the Group’s market shares in certain key segments in fiscal 2011. The Group is also vulnerable to fluctuating raw-material and packaging costs, as well as licence-renewal risk for brands not owned by F&N Holdings or its parent, Fraser and Neave Limited.

Considering the absence of TCCC brands, the more subdued performance of its Thai operations and stiffer competition, F&N Holdings is expected to post a more moderate set of results for FY Sep 2012. This may, however, be somewhat mitigated by the growth of its new and existing beverage products and revenue from contract packing for its related companies in Singapore. Contributions from its new Pulau Indah dairy plant, which has a larger production capacity than its current facility in Petaling Jaya, could also aid growth.

Similar to a year ago, the Group has allocated some RM500 million of investment outlay for potential acquisitions over the next 2 years, on top of its planned capex. “Even with a more modest near-term performance and a possibly higher debt level for its capex and potential acquisitions, the Group’s financial metrics are still considered sturdy. We expect its adjusted gearing ratio to hover around 0.3-0.5 times while its FFO debt cover is envisaged to range around 0.5-0.6 times over the next 3 years,” opines Kevin.

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