MARC AFFIRMS ALL RATINGS ON KWANTAS SPV SDN BHD’S RM155 MILLION SUKUK IJARAH AND RM65.0 MILLION MURABAHAH CP/MTN PROGRAMME

Jan 4, 2013 -

MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM40.0 million Class A asset-backed Sukuk Ijarah. The rating outlook remains stable. Concurrently, MARC has also affirmed its ratings on Kwantas SPV’s RM65.0 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) Programme at MARC-2ID(cg) /A-ID(cg) with a stable outlook. As the Murabahah CP/MTN Programme is backed by a corporate guarantee by the originator, Kwantas Corporation Berhad (KCB), the ratings and outlook are equalised with KCB’s corporate credit ratings which MARC has affirmed at MARC-2/A-.

The affirmed rating of the Class A sukuk is underpinned by the robust performance of the securitised plantation estates, particularly its fresh fruit bunch (FFB) production and net operating income (NOI). The affirmed rating also incorporates the collateral’s strong loan-to-value (LTV) ratio of 12.6%, which is consistent with a AAA rating. The LTV reflects MARC’s discounted cash flow valuation of RM315 million which in turn was derived from dividing the estates stabilised NOI of RM34.7 million by a capitalisation rate of 11%. The NOI in financial year ended June 2012 (FY2012) remained strong at RM52.2 million (FY2011: RM48.0 million) despite an increase in operating expenses to RM46.5 million (FY2011: RM43.6 million). The stable outlook on the rating reflects MARC’s expectation that the securitised estate will remain profitable despite the continuing volatility in crude palm oil (CPO) prices. The NOI of the securitised estates should comfortably cover principal repayments on the outstanding sukuk of RM40.0 million over its remaining tenure of two years.

As of August 31, 2012, the securitised estates comprise 8,247 ha of planted land, of which 99.2% are matured. Of the total mature area, approximately 75.8% or 6,201 ha of plantations are aged above 16 years. While the FFB production increased to 177,139 metric tonnes (MT) from 175,843 MT during the review period, the FFB yield has noticeably declined over the past five years as a result of its aging plantation profile. Nevertheless, the yield performance has consistently exceeded Sabah’s and Malaysia’s average fresh FFB yields. MARC expects that more than half of the area of the securitised estates would require replanting after three years. However, replanting is only expected to take place after the final redemption of Kwantas SPV’s debt obligations.

Meanwhile, the affirmed ratings and outlook on the Murabahah CP/MTN Programme reflect KCB’s satisfactory creditworthiness supported by its cash flow generation ability. In FY2012, KCB recorded revenue and pre-tax profit of RM1.3 billion and RM49.2 million respectively (FY2011: RM1.25 billion and RM148.0 million). The lower pre-tax profit is largely due to the pre-tax losses incurred by its oleochemical business segment mainly in respect of its Guangzhou-based subsidiary which has ceased operations since December 2009 and glycerine and oleochemical producing subsidiary in Zhangjiagang which has been experiencing declining margins. The decrease in FY2012 pre-tax profit was also partly resulted from the group’s one-time gain on disposal from the sale of land and subsidiary of RM52.6 million in the previous financial year.

KCB’s cash flow generation remained at a satisfactory level with its cash flow from operation (CFO) at RM72.8 million (FY2011: RM73.9 million). Going forward, MARC expects to see limited free cash flow generation at KCB due to the capital expenditure planned for its estate replanting exercise. KCB’s cash reserve of RM129.8 million and low debt burden remain key credit drivers for the company and its rating momentum.

Contacts:

Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my

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

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

Record trillion-ringgit bond and sukuk market in M'sia

The Star Online > Business

Monday January 7, 2013
Record trillion-ringgit bond and sukuk market in M'sia
ALTHOUGH 2012 did not end in a big bang (no pun intended!), the bond and sukuk markets in Malaysia continued to grow at a breakneck speed.
Conducive supply and demand dynamics, coupled with ample liquidity, helped lift the industry to new heights.
Despite the seemingly unsustainable growth rates recorded by the industry in the past year, it is still possible for the industry to prolong the high growth rate going forward.
To survive and be resilient, adaptation is key to the industry. This can only happen if the transformation agenda for the industry is unrelenting.
Growth in volume
The Malaysian fixed income market continues to register double digit growth in the last four years.
In 2012, the market breached the RM1 trillion (or RM1,000bil) mark for the first time on Oct 31, 2012 when the market ended the day with an outstanding amount of RM1,002.17bil (conventional bonds: RM534.84bil; sukuk: RM467.33bil).
By the end of 2012, the total market outstanding amount stood at RM1.011 trillion.
The promotion of the sukuk market through various initiatives has generated substantial dividends for the industry.
The high growth rate of 35.69% for the sukuk market in 2012 allowed it to catch up with the conventional bond market.
By the end of 2012, the sukuk market is close to parity with the conventional bond market. This year, 2013, there is a good possibility the sukuk market will surpass the conventional bond market in terms of value for the first time.
Malaysia maintains a healthy demand for bonds and sukuk.
Throughout 2012, RM635.86 billion worth of bonds and sukuk were successfully raised.
This factor has been facilitated by non-Malaysian domiciled issuers.
A number of issuers from South Korea and the Gulf States (among others) have taken the opportunity to raise capital by issuing bonds and sukuk in Malaysia.
Throughout 2012, RM1,620.51bil of bonds and sukuk were traded.
These trades were done via the professional or wholesale market.
With the launching of retail bond trading sometime in 2013, a new set of market players could start to make its presence felt and tip the demand factor to a higher gear.
Benchmark performance as measured by the TR-BPAM Bond Index Series indicates positive returns above the inflation rate for the 1-year and 2-year return categories.
As an asset class, the sukuk papers (benchmarked under the TR BPAM IndexIslamic) performed better compared to conventional bonds.
Using a simple linear trend line analysis, as shown in the graph, sukuk is expected to report better returns going forward .
Improving the efficiency of the fixed income market remains the focus of the regulators as well as market players.
Infrastructure improvements, legislation strengthening and skill set development are expected to be the core building blocks to move the industry to a higher level.
The announcement to allow retail players participate directly in the bond and sukuk markets bodes well for the industry as it opens a new dimension in the current supply-demand dynamics of the market which has been traditionally wholesale in nature.
The Way Forward
On the regulation front, the Capital Markets and Services (Amendment) Act 2012 which became effective on Dec 28, 2012 introduces a new approval framework that will facilitate the offering of a broader array of capital market products with the aim to encourage market and product innovation, promote market efficiency and allow more informed investment decisions.
The bulk of the effort must be aimed towards market education and access to information.
Once people are equipped with the necessary knowledge and have access to data, fixed income as an investible asset would be part of their financial investment portfolio considerations.
This would naturally create the demand pull and elevate the breadth and depth of the market to push the industry forward.

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Germany’s FWU Group issues largest Sukuk out of Europe

Germany’s FWU Group issues largest Sukuk out of Europe

Daily Cover

GERMANY: Takaful provider FWU Group has issued a US$55 million Sukuk Ijarah in a deal touted as the largest Islamic bond sale out of Europe and the first ever by a German corporate. The notes were structured similarly to the German state of Saxony-Anhalt’s quasi-sovereign EUR100 million (US$130.25 million) Sukuk issued in 2005; and were taken up by a number of GCC-based investors, primarily from within the Takaful sector. The Sukuk was backed by assets including intellectual property rights. Dr Manfred J Dirrheimer, the chairman of FWU Group, said that the financing will expand the group’s global network while broadening its Takaful offering; and provided an investment product for Takaful operators “often starved of such products.” Local consultancy firm RölfsPartner acted as the financial and tax advisor for the transaction, while Vinson & Elkins was the legal advisor. Loyens & Loeff advised on Luxembourg law and international tax structuring for the issuing special purpose vehicle (SPV), which was incorporated using a Dutch Stichting structure. Maples FS and ATC Capital Markets provided corporate services to the SPV and the Dutch Stichting, while Ernst & Young provided specialist intellectual property advice for the Sukuk’s underlying assets. While Germany has traditionally lagged behind its European counterparts Ireland, Luxembourg and the UK in supporting Islamic finance, FWU Group’s Sukuk and other recent developments, such as Kuveyt Türk Katilim Bankasi’s plans to launch Germany’s first fully-fledged Islamic bank, could signal that the tide might just be turning for the industry in the country.

RAM Ratings reaffirms LEKAS’s Senior and Junior Sukuk ratings, with negative outlook

Published on 04 January 2013

RAM Ratings has reaffirmed its ratings of Lebuhraya Kajang-Seremban Sdn Bhd’s (“LEKAS” or “the Company”) RM785 million Senior Sukuk Istisna’ (“Senior Sukuk’”) and RM633 million Junior Sukuk Istisna’ (“Junior Sukuk’”) at BB1 and B1, respectively; the outlook on the ratings remains negative. LEKAS is the highway concessionaire for the 44-km Kajang-Seremban Highway (“KSH” or “the Highway”) until May 2039; full tolling operations commenced on 21 September 2010.

The ratings of the Senior and Junior Sukuk continue to reflect low safety for payment on the respective financial obligations. Given the persistent mismatch between LEKAS’s cashflow generation and its financing obligations, the Company would still not have sufficient cash reserves to fully meet the first principal repayment on the Senior Sukuk of RM40 million, due in June 2014 (in 18 months). The rating difference between the Senior and Junior Sukuk is premised on the latter’s subordination in terms of cashflow priority and security.

The rating outlook signals further rating pressure if the management’s current refinancing plan fails to materialise within the next few months. Notably, the Company has made significant progress in the refinancing of the Senior Sukuk since the last rating review. The plan entails a refinancing and full redemption of the Senior Sukuk via a RM400 million Syndicated Term Loan (“STL”) and RM263 million of Redeemable Convertible Unsecured Loan Stocks. We understand that the term sheet for the STL has been finalised, with the entire exercise targeted for completion by end-February 2013. RAM Ratings will continue to closely monitor developments in this regard. Meanwhile, refinancing plans for the Junior Sukuk remain inconclusive at this juncture.

Media contact

Adeline Poh

(603) 7628 1021

adeline@ram.com.my

Bond Indices Performanceas at end of December 2012

Overview as at end of December 2012

Thomson Reuters BPA Malaysia Bond Indices Performance
Index Name				1-Month	YTD	2011	1-Year	2-Year	3-Year
TR BPAM ALL BOND IDX				0.37	4.48	4.99	4.48	4.74	4.93
TR BPAM CONV BOND IDX				0.39	4.24	4.79	4.24	4.51	4.61
TR BPAM SUKUK IDX				0.36	4.75	5.27	4.75	5.01	5.37
TR BPAM GOV ALL BOND IDX				0.35	4.14	4.75	4.14	4.44	4.47
TR BPAM GOV BOND IDX				0.37	4.15	4.79	4.15	4.47	4.48
TR BPAM GOV SUK IDX				0.31	4.10	4.66	4.10	4.38	4.44
TR BPAM CORP ALL BOND IDX				0.39	4.81	5.43	4.81	5.12	5.55
TR BPAM CORP BOND IDX				0.36	4.66	3.29	4.66	3.97	4.34
TR BPAM CORP SUK IDX				0.40	4.84	5.83	4.84	5.33	5.78

RAM Ratings has upgraded the rating of Premium Commerce Berhad’s (“PCB”) RM4 million Class B Notes Series 2011-A (“Class B Notes”) from AA2 to AAA while reaffirming the AAA rating of its RM133 million Class A Notes Series 2011-A (“Class A Notes”). Both long-term ratings have a stable outlook.

Published on 14 December 2012

RAM Ratings has upgraded the rating of Premium Commerce Berhad’s (“PCB”) RM4 million Class B Notes Series 2011-A (“Class B Notes”) from AA2 to AAA while reaffirming the AAA rating of its RM133 million Class A Notes Series 2011-A (“Class A Notes”). Both long-term ratings have a stable outlook. 

PCB is incorporated to undertake the securitisation exercise involving the automobile hire-purchase (“HP”) receivables of Tan Chong Motor Holdings Berhad’s (“Tan Chong”) subsidiary - TC Capital Resources Sdn Bhd (“TC Cap”) - via the issuance of a series of notes (“Notes Series”) under its RM2 billion HP Receivables-backed Medium-Term Notes Programme. TC Cap is the HP financing arm of Tan Chong, which in turn holds the sole rights for the assembly and distribution of Nissan and Ultimate Dependability vehicles in Malaysia. Notes Series 2011-A (“2011-A Notes”) represents the fifth of 6 issues under the Programme. As at 30 September 2012, RM137 million of the Class A and Class B Notes remained outstanding.  

The rating actions are premised on the continued strengthening of the available asset coverage, underpinned by the sturdy performance of the securitised portfolio and the deleveraging of the transaction. As at end-September 2012, the respective overcollateralisation (“OC”) ratios for the Class A and Class B Notes stood at 13.63% and 10.31%, backed by RM132.86 million of principal balance on the HP receivables and RM18.27 million of available cash. Meanwhile, the cumulative net default rate for the 2011-A Notes’ underlying HP receivables stood at 0.10%, well below our base-case cumulative default rate of 0.88%. The cumulative prepayment rate as at the same date stood at 4.79%, i.e. within our respective cumulative low- and high-prepayment rate assumptions of 4.50% and 18.75%. These levels of OC provide sufficient protection against the risk of prepayment and default under the “AAA” stressed rating scenario for the 2011-A Notes.

The ratings are also supported by the transaction’s legal and payment structures. These include a pass-through mechanism, which reduces any potential negative carry arising from low reinvestment returns, and a RM1 million Liquidity Facility Reserve that acts as a buffer to cover shortfalls in senior expenses and coupon payments on the Class A Notes.

As at 30 September 2012, the HP receivables in the portfolio comprised 3,086 HP contracts, with an outstanding principal balance of RM132.86 million. These loans had a weighted-average (“WA”) seasoning of about 22 months and a WA remaining tenure of 40 months. The WA size of the loans stood at RM58,703 as at the same date.

 

Media contact

Lee Sook Wei

(603) 7628 1017

sookwei@ram.com.my