RAM Ratings reaffirms Hong Leong Bank’s AA1/P1 ratings

Published on 03 January 2013

RAM Ratings has reaffirmed Hong Leong Bank Berhad’s (“Hong Leong Bank” or “the Group”) long- and short-term financial institution ratings at AA1 and P1, respectively. At the same time, the respective issue ratings of both Hong Leong Bank and Prominic Berhad (“Prominic” – a subsidiary set up to issue up to RM1.4 billion of Subordinated Notes under its Stapled Securities Issuance) have been reaffirmed (refer to table below). All the long-term ratings have a stable outlook.

Instrument	Rating Action	Rating	Outlook
Hong Leong Bank
Up to RM1.4 billion Capital Securities under the Stapled Securities Issuance	Reaffirmed	AA3	Stable
Up to RM2 billion Subordinated Medium-Term Notes Issuance Programme (2009/2029)	Reaffirmed	AA2	Stable
Up to RM1 billion Innovative Tier-1 Capital Securities Issuance Programme (2009/2069)	Reaffirmed	AA3	Stable
Up to RM1.7 billion Subordinated Notes (2010/2032)	Reaffirmed	AA2	Stable
Up to RM1.5 billion Nominal Value Subordinated Notes	Reaffirmed	AA2	Stable
Prominic Berhad
Up to RM1.4 billion Subordinated Notes under the Stapled Securities Issuance (2011/2061)	Reaffirmed	AA3	Stable

The reaffirmation of Hong Leong Bank’s financial institution ratings is premised on the Group’s strong franchise and sound credit fundamentals. The acquisition of EON Capital Berhad has increased the Group’s market share, with a stronger presence in consumer banking and small- and medium-sized enterprises as well as a wider distribution network. Having completed the integration exercise in May 2012, the Group will continue to focus on extracting merger synergies, enhancing efficiencies and rationalising its branch network.

Hong Leong Bank’s pre-tax profit came up to RM2.1 billion in FYE 30 June 2012 (“FY June 2012”), reflecting a full year’s consolidated profits. Concurrently, the Group’s return on risk-weighted assets improved to 2.3% for the year (FY June 2011: 2.2%). Overall, Hong Leong Bank’s asset quality is deemed robust. Its gross impaired-loan (“GIL”) ratio eased from 2.3% as at end-June 2011 to 1.6% as at end-September 2012. Meanwhile, strong recoveries had helped keep its credit-cost ratio low at 0.1%. Further comfort can be derived from the Group’s strong GIL coverage ratio of 134.3% as at end-September 2012. At the same time, its funding and liquidity profiles are perceived to be conservative, as depicted by its loans-to-deposits ratio of 72.8% and liquid-asset ratio of 33.2%.

Hong Leong Bank’s overall capitalisation levels are considered sound relative to its healthy asset quality and profit performance. As at end-September 2012, the Group’s tier-1 and overall risk-weighted capital-adequacy ratios stood at 12.0% and 15.8%, respectively. The Group had restored its capitalisation to pre-merger levels after having issued RM1.5 billion of subordinated debts and the adoption of Malaysia Financial Reporting Standards 139 on 1 July 2012.

Media contact
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my

BPAM is pleased to release the latest in our Report series - Brief Overview of the Different Generations of Independent Power Producers in Peninsular Malaysia

BPAM is pleased to release the latest in our Report series - Brief Overview of the Different Generations of Independent Power Producers in Peninsular Malaysia

This research report is accessible from BPAM's Official website under COMMENTARY & RESEARCH - BPAM Pricing Research.

 

 

MARC AFFIRMS ITS RATINGS ON TRADEWINDS PLANTATION CAPITAL SDN BHD’S SUKUK IJARAH, BANK- GUARANTEED CP/MTN AND CP PROGRAMMES

Jan 2, 2013 -

MARC has affirmed its AAAIS and AA+IS ratings on Tradewinds Plantation Capital Sdn Bhd’s (Tradewinds Capital) asset-backed RM180 million Class A and RM30 million Class B Sukuk Ijarah (collectively known as Sukuk) respectively. The outlook on the ratings is stable.

Special purpose vehicle Tradewinds Capital is a wholly-owned subsidiary of Tradewinds Plantation Berhad (Tradewinds) incorporated to issue the Sukuk Ijarah through a sale and leaseback agreement for a collateral portfolio comprising 12 oil palm estates and three palm oil mills. The ratings reflect the above-average performance of the securitised estates and comfortable loan-to-value (LTV) ratios relative to the respective rating bands. The stable outlook is premised on MARC’s expectations that the collateral portfolio would continue to exhibit results consistent with the ratings of the sukuk.

At the same time, MARC maintains its MARC-1ID(bg)/AAAID(bg) ratings on Tradewinds Capital’s RM100 million Bank Guaranteed Murabahah Commercial Paper/Medium Term Notes (BG Murabahah CP/MTN) Programme with a stable outlook. The ratings and outlook are equalised with bank guarantor OCBC Bank (Malaysia) Berhad’s (OCBCM) ratings and outlook which essentially reflect the credit strength of parent Oversea-Chinese Banking Corporation Limited (OCBC). MARC recently affirmed OCBC’s credit rating of AAA with a stable outlook. MARC regards OCBC as possessing a very strong economic incentive to maintain its Malaysian banking subsidiary’s financial soundness and competitiveness.

MARC has also affirmed its MARC-1ID rating on Tradewinds Capital’s RM90 million Murabahah Commercial Papers (Murabahah CP) with a stable outlook. The rating and outlook on the non-guaranteed Murabahah CPs mirror the short-term rating and outlook of Tradewinds as its operations would be the key source of repayment for the Murabahah CP. Tradewinds’ short-term rating reflects the group’s satisfactory liquidity and operating profitability, as well as borrowing availability under banking lines, moderated by its exposure to rubber price volatility post-acquisition of Mardec Berhad (Mardec). At the same time, MARC notes that cash flow generation has weakened during the first nine months of 2012 (9M2012), mainly as a result of higher working capital requirements at Mardec and Tradewinds’ lower pre-tax profitability, as well as ongoing capital expenditure. The rating and the outlook on the Murabahah CP could come under pressure in the event the group continues to incur negative free cash flow.

In the seven-month period ended July 31, 2012 (7M2012), the securitised estates posted fresh fruit bunch (FFB) yields of 10.4 MT/ha compared to 12.7 MT/ha in the previous corresponding period due to biological stress on the oil palm trees and poor weather conditions. As a result of the decline in yield as well as the lower crude palm oil (CPO) prices during the year, Tradewinds Capital recorded lower NOI of RM59.4 million (7M2011: RM105.7 million). However, coupled with the additional NOI of RM14.8 million from the securitised palm oil mills (7MFY2011: RM16.4 million), Tradewinds Capital’s NOI remain above MARC’s assumed NOI used in determining the LTV ratios of the collateral portfolio. Using MARC’s assumed NOI of RM42.0 million and capitalisation rate of 11%, the securitised assets are valued at RM450.4 million, resulting in LTV ratios for the Class A and Class B Sukuk of 20.0% and 26.6% respectively. The LTV ratios have declined since Tradewinds Capital met its last redemption of Class A sukuk of RM30.0 million on December 18, 2012. The principal repayments on the sukuk have the effect of lowering the LTV ratios, hence improving collateral backing for sukukholders over time.

During the 9M2012 period, Tradewinds’ revenue grew substantially to RM2.20 billion (9M2011: RM899.27 million) after taking Mardec’s results into consideration. However, after excluding Mardec’s revenue of RM1.48 billion, Tradewinds’ revenue was lower at RM718.4 million due to lower output and weaker CPO prices during the period. CPO prices averaged RM3,095/MT in 9M2012 compared with RM3,280/MT in the previous year’s corresponding period. The weaker prices, in addition to Mardec’s thinner margins, also resulted in the group’s operating profit margin declining to 10.5% (9M2011: 40.9%). Consequently, pre-tax profit declined to RM201.2 million (9M2011: RM358.0 million) in spite of a one-time gain of RM25.0 million from the sale of an associate.

Tradewind’s cash inflow from operations (CFO) decreased to RM67.2 million (9M2011: RM363.9 million) following a RM142.8 million increase in working capital requirements. Free cash flow was negative at RM150.6 million due to capital expenditure for the group’s planting and replanting activities and construction of the Kuala Suai Palm Oil Mill. Further capital outlays of RM114.9 million were incurred following the completion of acquisition of Retus Plantation Sdn Bhd (RPSB) from a related party on September 28, 2012. However, the acquisition will be accretive to Tradewinds’ cash flow and earnings in the fourth quarter of 2012. The company’s liquidity profile in the coming quarters will be a key driver of Tradewinds Capital’s Murabahah CP rating and outlook.

Contacts:

Tan Eng Keat, +603-2082 2265/ engkeat@marc.com.my;

Jason Kok, +603-2082 2258/ jason@marc.com.my ;

David Lee, +603-2082 2255/ david@marc.com.my

MARC AFFIRMS ITS AAAIS RATING ON MIDCITI RESOURCES SDN BHD’S RM880 MILLION SUKUK MUSHARAKAH IMTN PROGRAMME

Dec 31, 2012 -

MARC has affirmed its AAAIS rating on Midciti Resources Sdn Bhd’s (Midciti) outstanding RM880 million Sukuk Musharakah Islamic Medium Term Notes (IMTN) Programme. The outlook on the rating is stable. Midciti is a 76.1% indirect subsidiary of Petroliam Nasional Berhad (PETRONAS) and is the owner of the 88-storey PETRONAS Twin Towers. Rental payments from PETRONAS as the head lessee of the PETRONAS Twin Towers under a triple net lease agreement between the national oil company and Midciti will constitute the principal and profit payments under the programme. The affirmed rating reflects the creditworthiness of PETRONAS as the head lessee of the PETRONAS Twin Towers and implicit support provided by PETRONAS as the ultimate parent of Midciti. MARC currently maintains a public information rating of AAA/stable on PETRONAS based on the national oil company’s favourable business risk profile and credit metrics.

The rating affirmation, however, does not incorporate the recent proposal to inject PETRONAS Twin Towers into a real estate investment trust (REIT). MARC notes that the proposal is in the early stages and is subject to approvals from various authorities, including the IMTN noteholders. MARC understands that the outstanding sukuk will likely be refinanced by a new debt issuance under the REIT structure.

For the IMTN programme, MARC draws comfort that while a new agreement to replace the head lease agreement which had expired on September 30, 2012 is pending finalisation, PETRONAS has provided a letter of undertaking in the interim to extend the lease agreement for 15 years to September 30, 2027. The extension incorporates PETRONAS’ irrevocable guarantee to make contractual rental payments of not lower than the current rental rate of RM29.1 million per month, or RM349.3 million per annum, irrespective of occupancy levels. Additionally, the triple net lease provisions of the previous agreement have been retained. As a result, MARC observes that the sukukholders are insulated from the credit risk of sub-lessees, occupancy rate of the towers and the risk of fluctuations in rental rates. 

For the nine months financial period ended December 31, 2011 (FP Dec 2011), Midciti’s profit before tax increased significantly to RM1,110.6 million (FYE March 2011: RM262.1 million), mainly due to the fair value appreciation of the building by RM900.0 million in accordance with the FRS 140 Investment Property accounting standard. Excluding the fair value appreciation of the towers, Midciti’s annualised pre-tax profit would have increased by 7.2% from FYE March 2011 due mainly to lower interest costs. The company’s cash flow coverage ratios, namely its CFO interest coverage and debt service coverage ratio declined to 2.41 times (FYE March 2011: 3.55 times) and 0.4 times (FYE March 2011: 1.67 times) respectively in FP Dec 2011 due to higher cash payments to suppliers. Midciti’s leverage position as reflected by its debt-to-equity ratio improved to 0.17 times in FP Dec 2011 (FYE March 2011: 0.19 times) as a result of higher retained profits during the review period. Midciti’s borrowings consist solely of the outstanding RM880 million sukuk under the rated facility. The next repayment of RM280 million is due for redemption on October 3, 2014.

The stable outlook on Midciti’s rating reflects the stable outlook on its ultimate parent, PETRONAS and the expectation that support would be forthcoming from the latter, if required.

Contacts: 

Nisha Fernandez 03-2082 2269/ nisha@marc.com.my;

Jasmine Kua 03-2082 2280/ jasmine@marc.com.my;

Rajan Paramesran 03-2082 2233/ rajan@marc.com.my

MARC AFFIRMS AAAID(bg) AND MARC-1ID(s) RATINGS ON HORIZON HILLS DEVELOPMENT’S ISLAMIC BG MTN AND CP PROGRAMMES RESPECTIVELY.

Dec 31, 2012 -

MARC has affirmed its AAAID(bg) and MARC-1ID(s) ratings on Horizon Hills Development Sdn Bhd’s (Horizon Hills) Islamic Bank Guaranteed Medium Term Notes (IMTN) Programme of up to RM200 million and Islamic Commercial Papers (ICP) Programme of up to RM70 million respectively. The ratings carry a stable outlook. Horizon Hills is jointly-owned by UEM Land Berhad (UEM Land) and Gamuda Berhad (Gamuda).

The rating affirmation on the IMTN Programme reflects MARC’s public information counterparty credit rating of AAA/Stable on Public Bank Berhad (PBB) which has provided an irrevocable and unconditional guarantee on the programme. The rating is premised on PBB’s healthy asset quality, robust profitability and strong market position in Malaysia as the third largest commercial bank. The affirmed rating on the ICP programme reflects the credit strength of Horizon Hills’ shareholders, UEM Land and Gamuda, both of which carry MARC’s short-term rating of MARC-1. UEM Land and Gamuda have provided unconditional and irrevocable undertakings to meet any financial obligation under the rated debt of up to RM280 million proportionately. In addition, the shareholders have also provided a guarantee to fund any cash flow deficit in the Horizon Hills project and in respect of financial covenants pertaining to the rated notes of up to RM30 million.

Located within Nusajaya in Iskandar Malaysia, the Horizon Hills development has progressed well since beginning its launch in 2007, consistently meeting sales targets. As at August 31, 2012, ongoing projects registered an average 88% take-up rate. MARC observes that the development has continued to elicit strong foreign interest, in particular from Singapore, with foreign purchasers accounting for 43% of the total to date. With a remaining 750 acres of the initial 1,033 acre site (excluding the 18-hole golf course) still available for future developments, MARC expects Horizon Hills to continue to launch projects in the medium- and high-end segment.

As at August 2012, Horizon Hills has launched a total of 1,807 mixed residential and commercial units with a gross development value of RM1,292 million, and has earmarked the launch of further projects with a GDV of RM488.1 million by 1H2013. Nonetheless, increasing competition from nearby developments in Iskandar Malaysia could weigh on its sales performance going forward. However, Horizon Hills’ unbilled sales of RM364 million as at August 31, 2012 would provide earnings visibility over the next two years.

For the half-year ending June 30, 2012 (1HFY2012), revenue and pre-tax profit grew strongly to RM146.3 million (1HFY2011: RM77.5 million) and RM45.5 million (1HFY2011: RM15.1 million) respectively. Correspondingly, the operating profit margin rose to 31.1% in 1HFY2012 (1HFY2011: 19.5%). The growth momentum is the result of increased launches and strong take-up rates for Horizon Hills’ projects launches. For FY2011, the company generated improved revenue of RM203.1 million and pre-tax profit of RM47.1 million. Cash flow from operations increased to RM67.4 million in 1HFY2012 (1HFY2011: RM18.3 million) due to the company’s improved operating profit and cash inflow on trade receivables and other receivables. Horizon Hills’ debt-to-equity (DE) ratio declined to 0.90 times as at June 30, 2012 (FY2011: 1.11 times) due to the 14% increase in shareholders’ equity to RM277.3 million (FY2011: RM243.3 million), mainly from retained earnings. The DE remains well within the covenanted ratio of 2.33 times.

The IMTN and ICP noteholders are insulated from downside risks in relation to Horizon Hills’ credit profile by virtue of the guarantee provided by PBB, Gamuda and UEM Land.

Contacts:

Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;

Jasmine Kua, +603-2082 2280/ jasmine@marc.com.my;

Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.

RAM Ratings reaffirms Alliance Bank’s A1/P1 ratings, with a stable outlook

Published on 31 December 2012

RAM Ratings has reaffirmed Alliance Bank Malaysia Berhad’s (“Alliance Bank” or “the Group”) long- and short-term financial institution ratings at A1 and P1, respectively. Concurrently, the A2 rating of the Group’s RM1.5 billion Subordinated Medium-Term Notes Issuance Programme (2011/2026) (“Subordinated Notes”) has also been reaffirmed. Both long-term ratings have a stable outlook. The 1-notch difference between the rating of the Subordinated Notes and Alliance Bank’s long-term financial institution rating reflects the subordinated nature of the debt facility to the Group’s senior creditors.

Alliance Bank is the smallest domestic banking group in Malaysia. It holds about 2% of the outstanding loans and deposits in the banking system, and has a notable presence in consumer banking and also among small and medium-sized enterprises. On the other hand, the Group’s Islamic and investment-banking franchises are viewed to be relatively weak. On the whole, the Group’s asset quality is perceived to be healthy. Its gross impaired-loan ratio had eased further to 2.3% as at end-September 2012 (end-March 2011: 3.3%) while its credit-cost ratio has been clocking in at a low 0.1% for the past 2 fiscal years, thanks to commendable recoveries.

Alliance Bank benefits from a relatively large pool of low-cost current- and savings-account deposits, which are generally more stable; these made up 34.4% of its deposit base as at end-September 2012, well ahead of the banking system’s 24.9% average. With the momentum of loan growth picking up, its loans-to-deposits ratio had edged up to 81.2% as at the same date (end-March 2011: 75.2%) – a level still deemed sound. Underpinned by stronger investment and fee incomes, the Group delivered a better pre-tax profit of RM648.4 million in fiscal 2012 (fiscal 2011: RM559.8 million). For 1H fiscal 2013, Alliance Bank posted a pre-tax profit of RM358.0 million. Meanwhile, Alliance Bank’s capitalisation levels remained solid, with its tier-1 risk-weighted capital-adequacy ratio coming in at 12.1% as at end-September 2012.

Media contact

Peter Kong

(603) 7628 1029

peterkong@ram.com.my