RAM Ratings assigns preliminary AAA(bg)/P1 ratings to Adventa’s proposed debt issues

RAM Ratings has assigned preliminary enhanced ratings of P1 and AAA(bg) to Adventa Berhad’s (Adventa or the Group) proposed RM150 million Islamic Commercial Papers/Islamic Medium-Term Notes (ICP/IMTN) Programme (2011/2018); the long-term rating has a stable outlook.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD’S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

http://www.marc.com.my/ratbase/pub.press.detail.php?aid=3960

RAM Ratings downgrades rating of SESCO's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has downgraded the rating of Syarikat SESCO Berhad’s (SESCO) RM605 million Al-Bai Bithaman Ajil Islamic Debt Securities (2001/2012), from AAA to AA1; the long-term rating has a stable outlook. SESCO is the exclusive provider of electricity and sole off-taker of all the generating capacity in Sarawak.

The rating downgrade reflects the weaker financial profile of SESCO arising from the heavier capacity-payment obligations anticipated via power purchase agreements for the new and sizeable power plants under the Sarawak Corridor of Renewable Energy (or SCORE). The sizeable new power-generating capacity will also increase demand risk for SESCO and its holding company, Sarawak Energy Berhad (SEB). As an investment-holding company, SEB relies on residual cashflow from its subsidiaries, particularly SESCO (its utility arm), to support its heftier debt load. On this account, the credit profiles of the 2 entities are viewed to be closely linked. For further details on SEB, please refer to our press release on 24 May 2011, entitled RAM Ratings assigns preliminary AA1 rating to Sarawak Energy’s proposed RM15 billion sukuk.

www.ram.com.my

MARC REMOVES MAXTRAL INDUSTRY BERHAD'S RATINGS FROM MARCWATCH NEGATIVE; DOWNGRADES TO BBB+ID AND MARC-3ID/BBB+ID

MARC (May 25, 2011): MARC has downgraded its ratings on Maxtral Industry Berhad's (Maxtral) RM80.0 million Al-Bai’ Bithaman Ajil Islamic Debt Securities (BaIDS) and RM20.0 million Murabahah Underwritten Notes Issuance/Murabahah Medium Term Notes (MUNIF/MMTN) facilities to BBB+ID and MARC-3ID/BBB+ID from AID and MARC-2ID/AID respectively. Concurrently, the ratings have been removed from MARCWatch Negative where they were first placed on November 26, 2010. The rating action affects RM20.0 million of BaIDS outstanding under the RM80.0 million BaIDS programme and RM20.0 million of notes issued under the MUNIF/MMTN programme. The rating downgrades reflect Maxtral’s weak liquidity and continuing weak operating performance.

Since MARC’s last rating update in February 2011, the company has met its RM20.0 million BaIDS repayment on April 13, 2011 with proceeds from a bank term loan. The next BaIDS repayment of RM20.0 million is due on April 13, 2012. The timber and timber products company faces moderate refinancing risk in respect of the RM20.0 million April 2012 BaIDS repayment. MARC has been informed that the company plans to meet its remaining obligations under the rated programmes with proceeds from a syndicated loan.

Maxtral’s vulnerability to prolonged shortages in log supply, fluctuating demand for timber and timber products as well as USD/Ringgit exchange rate exposures weighed on its operating performance in 2010 and in the first quarter of 2011. For the financial year ended December 31, 2010 (FY2010), the company posted a pre-tax loss of RM11.99 million compared to pre-tax profit of RM6.5 million the previous year against a revenue base which declined sharply by 69.4% to RM61.5 million (FY2009: RM200.7 million). In the first quarter of 2011, Maxtral’s quarterly pre-tax losses widened to RM4.2 million (Q1FY2010: pre-tax loss of RM3.4 million) on revenue of RM8.3 million (Q1FY2010: RM27.5 million). Maxtral has short-term debt of RM40.8 million as of May 24, 2011 but only unencumbered cash and bank balances of RM0.7 million. Cash flows have been significantly affected by the harsh trading conditions, and Maxtral’s strategy is to extend its debt maturity profile by replacing its BaIDS with new long-term financing.

The company is operating at only 20% of its installed capacity, and MARC understands from Maxtral that a recovery in trading volumes is likely in the near term given the improved demand prospects and recently secured access to log supplies until 2013. However, this is unlikely to lead to a significant improvement in its financial metrics over the next 12 to 18 months.

The stable outlook on the lowered ratings assumes that Maxtral will be able stabilise its operating margins over the next several quarters in line with an expected pick-up in its trading volumes. MARC also expects Maxtral to make meaningful progress in its refinancing plan ahead of its 2012 BaIDS repayment. MARC could revise the outlook and/or the ratings if there are any material setbacks in Maxtral’s refinancing plan or the anticipated pick-up in its trading volumes fails to materialise.

www.marc.com.my

RAM Ratings reaffirms Prai Power's AA3 rating

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA3 rating of Prai Power Sdn Bhd’s (Prai Power or the Company) RM780 million Al-Istisna Fixed-Rate Serial Bonds (Bonds), with a stable outlook. Prai Power is an independent power plant (IPP) that owns and operates a 350-MW combined cycle, gas-turbine power plant in Prai, Penang (the Plant).

The rating remains supported by Prai Power’s strong business profile, underscored by the favourable terms of its power purchase agreement (PPA) with Tenaga Nasional Berhad (TNB). For the period under review, the Company was able to claim 99.2% of its available capacity payments (ACPs) and fully pass through its fuel costs to TNB.

Nonetheless, Prai Power has utilised much of its allowance for scheduled maintenance permitted under the PPA during the first (2009) and second (2010) years of its third 3-year availability target (AT) block ending 31 December 2011. Given this, it remains a challenge for the Company to meet the AT requirement for the current AT block; should there be a breach, the Company would have to pay penalties to TNB. Meanwhile, the Plant underwent more unscheduled maintenance in 2010. Based on RAM Ratings’ sensitivity tests, however, Prai Power’s debt-servicing ability is envisaged to remain intact, with a minimum financial service coverage ratio of 1.50 times (with cash balances, post-distribution) on principal repayment dates. Our sensitised cashflow assumes that the Company will adhere to its financial covenants throughout the Bonds’ tenure (i.e. on a forward-looking basis as opposed to only the year).

Meanwhile, the single-shaft design of the Plant is an inherent technological limitation for Prai Power as the entire facility would have to be shut down should it experience any disruption to any component attached to the generator. The compensation from its operation and maintenance service provider - capped at RM9 million - and insurance against revenue losses, while in place, may not be sufficient to cover the Plant’s revenue losses should it experience lengthy unscheduled outages, as was the case in 2006. While the losses in ACPs so far have not dented Prai Power’s financial profile, we note that its debt-servicing ability may be affected by the recurrence of lengthy unscheduled outages. In addition, the rating remains moderated by regulatory and single-project risks, similar to all other IPPs.

www.ram.com.my

Bond Market Performance 24 May 2010 - 24 May 2011

The one year performance (24 May 2010 - 24 May 2011) of the Conventional bonds versus the Islamic sukuk in the Malaysian bond market using the BPA Malaysia FiiX Bond Index Series.

Double click on the image to enlarge.

Based on the graph, the sukuk market outperforms the conventional bond market.

See: www.bpam.com.my

RAM Ratings reaffirms AA1 rating of GB3's Islamic debt securities

RAM Ratings (24 May 2011): RAM Ratings has reaffirmed the AA1 rating of GB3 Sdn Bhd’s (GB3 or the Company) RM850 million Senior Secured Al-Bai Bithaman Ajil Bond Facility (ABBA Bonds), with a stable outlook. GB3 is an independent power producer (IPP) operating a 640-MW combined-cycle, gas-turbine power plant (the Plant) in Lumut, Perak.

The rating remains supported by GB3’s strong business profile, underscored by the favourable terms of its Power Purchase Agreement (PPA) with Tenaga Nasional Berhad (TNB). Similar to all other IPPs, however, the rating is moderated by regulatory and single-project risks.

In 2010, GB3 incurred available capacity payments (ACPs) loss of RM5.70 million, as its unscheduled outage rate (calculated based on a 365-day rolling average) exceeded the PPA limits following an incident involving one of its transformers in May 2009. However, there had been no material financial impact on the Company as such ACP losses and penalties had been largely compensated by both the insurer and the IPP’s operations and maintenance (O&M) service provider.

Meanwhile, we note that it may be challenging for GB3 to meet the requirement on its 3-year availability target (“AT”) due to the tight average AT of 91.53% projected for the third 3-year AT block (2009 to 2011) versus the PPA limit of 91.50%, which leaves little room for variations. Nonetheless, some comfort can be derived from the liquidated damages up to RM4 million claimable under its O&M Agreement.

Based on a stressed scenario, GB3’s minimum and average finance service cover ratios (FSCRs) (with cash balances, post-distribution) on principal repayment dates are projected to come in at 1.25 times and 1.51 times, respectively. RAM Ratings assumes that the Company will adhere to its financial covenants throughout the ABBA Bonds’ tenure (i.e. on a forward-looking basis). Such financial covenants include compliance with its finance service reserve account requirement, a post-distribution FSCR of 1.25 times and a debt-to-equity ratio of 90:10. Notably, the minimum covenanted FSCR is less stringent than those of the other AA-rated IPPs in RAM Ratings’ portfolio. All said, GB3's debt-servicing ability has remained strong to date, with its FSCR (with cash balances, post-distribution) hovering around 1.89 to 2.71 times over the past 5 years.

Full report: www.ram.com.my

RAM Ratings reaffirms TNB's AAA debt rating

RAM Ratings (20 May 2011): RAM Ratings has reaffirmed the AAA rating of Tenaga Nasional Berhad’s (TNB or the Group) USD500 million equivalent Murabahah Medium-Term Notes Programme (2005/2025); the long-term rating has a stable outlook.

The rating reflects TNB’s position as Malaysia’s national electricity company, with a near-monopoly over the transmission and distribution of electricity across Peninsular Malaysia and Sabah. TNB also plays a crucial role as the sole-off-taker for the generating capacity and electrical energy produced by all the independent power producers (IPPs) in Peninsular Malaysia. Meanwhile, the Group remains a dominant player in the domestic power-generating business, controlling 53% of Peninsular Malaysia’s generating capacity despite the growing presence of IPPs in the past decade.

In view of the strategic nature of TNB’s role as Malaysia’s national electricity company, it enjoys strong implicit support from the Government, i.e. its major shareholder. Previous tariff reviews - which had helped the utility giant pass on its rising coal costs to consumers - and subsidised gas prices underline the implicit support received by TNB.

As at end-August 2010, TNB’s balance sheet was weighed down by its hefty RM21.26 billion debt burden. As half of this was denominated in Japanese yen and US dollars, the Group is exposed to fluctuations in foreign-exchange (forex) rates. Nonetheless, we recognise the improvement in TNB’s key financial metrics after the Group trimmed its debt level from nearly RM30 billion 5 years ago; as at end-August 2010, its gearing ratio had eased to 0.74 times. After including its heavy debt load from the fixed capacity-payment obligations under the Group’s Power Purchase Agreements (PPAs) with the various IPPs, its adjusted gearing ratio climbed up to 1.74 times while its adjusted funds from operations debt coverage stood at 0.23 times as at end-August 2010.

Given the increasing dependence on coal-powered generation – which accounted for 40.2% of Peninsular Malaysia’s generation mix in FY Aug 2010 compared to 28.6% the previous corresponding period – TNB remains vulnerable to unfavourable movements in coal prices and forex rates, as supply is procured at international prices. As coal costs already represent more than half of its total fuel costs and in view of still-rising coal prices, the Group’s margins will face further downward pressure. Nevertheless, the impact of heftier generation costs may be moderated by the stronger ringgit against the US dollar.

Full article: www.ram.com.my

Key thrusts to develop Malaysia as an Islamic Financial Hub

Malaysia is a small country. With just over 26 million people and categorized as a “developing” nation, we must get our strategy correct as we may not be given the chance to start over if we miss the boat. After being involved in this industry for the last 19 years, in my humble opinion, these are the comparative advantage that we need to leverage on.

Impressive Human Capital

Without doubt, Malaysia has produced some of the best minds in Islamic finance. The experienced gained from the very vibrant Islamic finance market within Malaysia has been instrumental in building the skill sets as well as interest in the industry. In this context, I am referring to the professional human capital and not just the management class. Financial engineering, risk management, Syariah and legal are key components for a successful Islamic finance market and Malaysians are at the forefront in all these fields. In fact, Malaysia has been exported experts on these fields all over the world.

Vibrant Capital Raising Conduits

Malaysia has many capital raising conduits for Islamic Finance. From multinationals all the way down to the individual consumer, the ability to raise financing is very easy in Malaysia. The Sukuk market is very active and the numerous Islamic banks also help in the reallocation of capital to those that need them. The various options available to get capital are an important component that has helped the country to grow.

Ample Liquidity to Meet Demand

Malaysia has ample liquidity due to the high saving nature of the populace. Demand for capital has been met by overwhelming response by investors. The availability of numerous Islamic financial institutions that are able to aggregate savings makes Malaysia as a favorite destination to issue capital. Many multinationals have done so via the Sukuk market.

Transparent Legal and Regulatory Regime

The laws and regulatory regimes in Malaysia are second to none. The symbiotic existence of the Islamic finance laws with the English Common law makes Malaysia a very safe destination for all stakeholders as their rights are easily known and any disputes can be litigated using transparent rules.

Free Flow of Information

It is easy for financial information to be obtained in Malaysia. From trading data up to legal documents, users can easy access it. Everyone can make an informed decision based on the information available. Compared to other countries in the world, Malaysia is one of the top in terms of getting financial information.


We only need to focus on this four items and we can place Malaysia on the map.

MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s Senior Class A Sukuk Ijarah MTN

MARC (May 18, 2011): MARC has removed its AAIS rating on DRIR Management Sdn Bhd’s (DRIRM) Senior Class A Sukuk Ijarah Medium Term Notes (MTN) from MARCWatch Negative pending the forthcoming June 2011 redemption of the remaining outstanding RM40 million principal amount of the MTNs. DRIRM will redeem the notes with cash from its Debt Service Reserve Account (DSRA) which is sufficiently funded for the purpose.

However, MARC continues to maintain its AA-IS rating on DRIRM’s RM160 million Class B Sukuk Ijarah MTN on MARCWatch Negative pending noteholders’ approval to convert the notes into non-publicly traded notes.

MARC expects to withdraw its rating on the Class B Sukuk upon receipt of notice of request for rating withdrawal from the issuer and confirmation that the aforementioned consent has been obtained.

Full report: www.marc.com.my