CREDIT ANALYSIS REPORT

Kwantas SPV Sdn Bhd - 2006

Report ID 2294 Popularity 1787 views 98 downloads 
Report Date Apr 2006 Product  
Company / Issuer Kwantas SPV Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale
Under this transaction, Kwantas SPV Sdn. Bhd. (SPV), a special purpose company and a wholly owned subsidiary of Kwantas Corporation Berhad (KCB) has been incorporated for the sole purpose of owning and leasing plantation properties for the benefit of the Islamic securities investors as well as issuing up to RM65.0 million Murabahah Commercial Papers/Medium Term Notes Programme (CP/MTN) to part-finance working capital requirements of KCB group. SPV will purchase identified plantation properties from subsidiaries of KCB consisting of Kwantas Plantations Sdn Bhd (KPSB), Aman Bersatu Sdn Bhd (ABSB) and Benar Bersatu Sdn Bhd (BBSB) (collectively refered to as sellers and/or lessees) with the purchase funded by proceeds from the issuance of RM155.0 million Sukuk Ijarah to Sukuk Ijarah investors. Subsequent to the purchase, SPV will lease back the plantation properties to the sellers under separate Ijarah agreements. The Ijarah agreement covers a period of nine years with lease payments equivalent to Sukuk (i.e. principal) and Return (i.e. profit) payment thus forming the source of repayment thereof. The sale of the plantation assets does not involve the transfer of legal title although SPV essentially purchases beneficial interests in the plantation estates owned by KPSB, ABSB and BBSB. Interests of the investors are further protected with the first fixed legal charge over the plantation properties.

MARC has assigned ratings of AAAID, AAID and A+ID to RM80.0 million Class A, RM15.0 million Class B and RM60.0 million Class C Sukuk Ijarah of which Class A, Class B and RM25.0 million of Class C represents the asset-backed classes; and MARC-1ID/A+ID to RM65.0 million Murabahah CP/MTN. The ratings of RM35 million of Class C Sukuk Ijarah and the Murabahah CP/MTN mirror the corporate rating of KCB. The ratings under the Sukuk Ijarah reflect the quality of the plantation properties; the structural features incorporated into the transaction; reasonably low loan-to-value ratios (LTVs) for Class A, B and C at 37.0%, 44.0% and 55.5% respectively; and the irrevocable undertaking provided by KCB (rated A+ by MARC) to provide sufficient funds to ensure the lessees meet their periodic lease payments. The proposed transaction incorporates serial redemption commencing at the end of Year 2 from date of issuance for the Sukuk Ijarah and at the end of Year 5 for the Murabahah CP/MTN. With Ijarah payments equivalent to the Sukuk and Return payments during the tenure of Ijarah agreements, the entire Sukuk Ijarah would be redeemed by end of Year 9 leaving SPV with the option to sell the plantation properties to the lessees at a nominal value of RM1.

The plantation properties securitised comprising total mature area of 6,879.62 ha, of which about 85.4% are prime mature palms, are all located within the district of Lahad Datu, Sabah. The securitised plantation properties’ Fresh Fruit Bunch (FFB) yield (MT/ha) have, on a collective basis, exhibited commendable growth with average yield for 2005 exceeding Sabah’s and Malaysia’s average at 23.0 MT/ha and 18.9 MT/ha respectively. On the whole, FFB production of the Group for FY2005 marked a significant improvement of 63% to 310,528 MT due to better yield from existing estates and the inclusion of contribution from the newly acquired companies with larger land areas. The Group’s oil extraction rate (OER) for CPO of 21.2% was slightly lower than Sabah’s average at 21.4% (2005) but slightly higher than the Malaysia’s average at 20.11% (2005). The improvement in FFB yield and OER is sustainable given the high mature-to-planted area ratio, well laid infrastructure and accessibility to other plantations, good location and use of state of the art processing technology.

The lease payments payable by the lessees are backed by irrevocable undertaking provided by KCB. KCB group derives more than 90% of its revenue from refined oil products with refined, bleached, deodorised olein (RBDOL) as the largest contributor to revenue averaging 37% of total revenue from FY 2001 to FY 2005. With average year-on-year growth in profit before tax of 87.1% for the last four years, shareholders’ funds amounts to RM453.7 million as at 30 June 2005.

Each classes under the Sukuk Ijarah was sized based upon the maximum amount that be raised at each rating level. Due to the serial redemption commencing in the second year, actual LTV for Class A under the Sukuk Ijarah at maturity, is significantly lower than the LTV parameters applied when sizing the securities. Based on stress testing performed which incorporated lower prices of palm oil products, the DSCRs appear reasonably resilient.
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