MARC has reaffirmed the rating of Europlus Corporation Sdn Bhd’s (ECSB) RM350 million Murabahah Underwritten Notes Issuance Facility (MUNIF) at MARC-3ID. The reaffirmation reflects the substantial locked-in sales from developments secured under the MUNIF which essentially acts to mitigate market risk. The rating is, however, moderated by delays in construction works and ultimately progress billings which affected its cash flow position. The delays which were triggered by the foreign labour repatriation exercise in 2002 continued to persist going into 2003 as efforts to normalize construction works were hampered by industry-wide problems such as steel bar and sand shortages and adverse weather conditions. Delays in obtaining regulatory approval at the vacant possession stage for several developments further exacerbated the delays in cash inflows. It is on these premises that MARC has placed the rating on a negative outlook. This rating action follows the difficulties faced by ECSB in meeting scheduled SFA payments, resulting in the restructuring of the MUNIF’s SFA payment schedule, duly approved by the Bondholders.

The restructuring of the MUNIF’s SFA payment schedule and lengthening of the facility’s tenure aimed to provide ECSB some measure of flexibility and buffer in fulfilling its obligations under the facility. MARC is, nevertheless, wary of the potential threats that might arise from industry wide problems, in particular raw material shortages that are likely to persist in the next six months. The rating action also contemplates ECSB’s higher than average operational sensitivity to these industry wide factors.

Additional liquidity buffers are also provided under the issue structure where in the event the aggregate value of sale proceeds should fall below 1.43x, ECSB is obliged to procure the assignment of proceeds from other developments so as to maintain the 1.43 times coverage. As stipulated under the MUNIF’s issue structure, remaining proceeds from projects initially assigned under the redeemed BAIDS issue will be assigned to the MUNIF’s SFA as additional liquidity buffer. Total bondholders’ exposure has also been effectively reduced to RM270.0 million subsequent to the redemption of RM80.0 million of the MUNIF in September 2003. As at end March 2004, ECSB is in fact ahead in its restructured SFA payment with the cumulative SFA balance amounting close to RM40 million.

Total receivables from secured sales of the Bukit Beruntung I, II & III, Lagoon Perdana, Kinrara Section 3 and Pulau Melaka developments as at 30 September 2003 amounted to RM477.5 million (equivalent to 1.8 times the MUNIF issue, after netting off the redeemed portion amounting to RM80.0 million). This is supported by receivables from Putra Perdana and Ukay Perdana which amounted to RM398.1 million. The MUNIFholders’ exposure is hence adequately covered by the secured sales, despite the above average market risks of several developments secured under the facility.

ECSB posted weaker results in FY2003 with revenue and pre-tax profit decreasing by 6.0% and 55.9% to RM417.6 million and RM33.6 million respectively. Its weaker bottomline result was mainly attributable to a product mix that was geared towards market demand for lower to medium priced properties which generally offer lower margins. This is opposed to the product mix at the initial stages of the developments which were higher priced properties such as semi-detached houses. Revenue was also affected by the labour and raw material shortage problems. Pro-forma debt-equity as at end November 2003 stood at 0.9 times; a reduction from 1.6 times registered in March 2003, after netting the redeemed RM250 million BAIDS issue, the redeemed RM80.0 million MUNIF issue and balances in the SFA as at end November 2003.