MARC has downgraded the ratings of Ample Zone Berhad’s (AZB) Sukuk Al-Ijarah comprising of RM50 million Class A Sukuk, RM25 million Class B Sukuk and RM75 million Class C Sukuk (Sukuk) from AAAID, AAID and AID to AA+ID, AID and BBID, respectively. The ratings reflect the deterioration of AZB’s cash flow resulting from the non rental payment from subsidiaries of Talam Corporation Berhad (TCB), being the major tenant in Menara Maxisegar (MM). This has warranted a reassessment of MM’s discounted cash flow (DCF) valuation based on the revised stabilized net cash flow (NCF) which has been recomputed to reflect MARC’s expectation of rental collections, going forward. In order to ascertain the movement in the rating for Class A and B Sukuk, MARC undertook a comparison on the weighted average loan-to-value (LTV) of the Assets for the period under review (February 2005 to March 2006) against weighted average LTVs at closing. Weighted average LTVs are utilized under this transaction as the Sukuk are backed by three different types of properties: retail, office and hospital with each type carrying different LTV limits.

Under this Ijarah sale and lease back transaction, AZB, a special purpose vehicle with certain bankruptcy remoteness features, incorporated solely to undertake this securitisation exercise, acquired four buildings comprising of MM, Wisma Talam (WT), Midpoint Shopping Complex (MP) and Pandan Kapital Shopping Complex (PK) (the Assets) from three subsidiaries of Talam Corporation Berhad (TCB) and one private company (Sellers). AZB leases the Assets back to the Sellers (also the lessees) under Ijarah Rental Agreements (IRA) in return for periodic rental payments. AZB funded the purchase of the Assets via proceeds from issuance of the Sukuk. The transaction incorporates partial amortization of Class A and B Sukuk on an annual basis commencing on the second anniversary from issuance. With 22% of Class A and 36% of Class B Sukuk to be amortised prior to Year 7, approximately 78% of Class A and 64% of Class B will be subject to refinancing risk. Periodic rental payments from the lessees forms the repayment source for the capital (ie principal) due prior to Year 7 and profit under the Programme whilst the capital due in Year 7 is expected to be redeemed using the proceeds from the disposal of the Assets to the Sellers via the Purchase Undertaking or to TCB via an option exercisable by the Sukuk Trustee. In the event the Assets are not purchased by the Sellers or TCB, the Sukuk Trustee also has the power of attorney to dispose the assets to third parties, proceeds of which could also form the source of repayment of the Sukuk.

Based on the DCF valuation of MM, the weighted average LTV for Class A increased from 26.0% at closing to 32.0%. Although the revised LTV is within the AAA limit acceptable to MARC and actual rental collections is more than sufficient to provide for Class A profit payments, the Class A Sukuk is nevertheless exposed to some vulnerability from lower rental collections affecting Class C Sukuk as well as the uncertainty of TCB honouring the purchase undertaking in Year 7. Therefore, MARC has downgraded Class A from AAAID to AA+ID. In respect of Class B, the revised weighted average LTV increased from 38% to 47.0% which represent the weighted average LTV within the A band. Nevertheless, the priority accorded to Class A and B in terms of security and payment are positive rating considerations given that market value and force sale value of the properties are RM236.0 million and RM187.2 million respectively, based on the valuations conducted in mid 2004 which are approximately 36% and 20% in excess of total Class A, B and C Sukuk outstanding at the time of review. In addition, liquidity risk is mitigated to a certain extent by the maintenance of a 12 months pre-funded coupon in the reserve account.

The rating of the Class C Sukuk reflects the credit rating of TCB by virtue of the unilateral, unconditional and irrevocable option/undertaking given by TCB and/or the Sellers to AZB to purchase the Assets. In view of the current financial distress experienced by the TCB Group, the ongoing restructuring exercise, TCB Group’s desktop rating has been downgraded to BB which has resulted in the downgrade of the Class C Sukuk rating to BB.

The Assets are located in the main commercial hub in Pandan Indah, a mixed development scheme approximately 8 km to the south east region of Kuala Lumpur city centre. Based on the period under review, average rental revenue was found within 5% to 20% lower as compared to the budgeted figures for the Assets with exception to MM which reported a variation of 60%, the latter attributed to non rental payment from the TCB Group. MARC expects the total variation of WT, MP and PK to narrow as rental of WT will escalate over the tenure of the transaction. MARC notes that the Assets are vulnerable to tenant concentration to several key anchor tenants. MARC, however, takes comfort that the anchor tenants have renewed their tenancy agreement for a further three years as confirmed by management and that the historical tenancy profile of the Assets has shown stable occupancy.