The rating of Shamelin Bina Sdn Bhd’s (“SBSB”) RM100 Million Murabahah Medium-Term Note Issuance Facility (MMTN) has been reaffirmed at A-ID. The reaffirmed rating principally reflects the financial and credit profile of SBSB’s consumer co-operative parent, Koperasi Shamelin Berhad (KSB), and the notes’ protective issue structure, offset by the cyclical nature of the consumer goods financing industry and heightened competition which has resulted in more aggressive growth strategies by co-operatives. The rating outlook is stable.

SBSB, a wholly owned subsidiary of KSB, issued the MMTN, the proceeds of which are largely on-lent to its parent for the purpose of refinancing its existing borrowings and generating new consumer financing. The cashflows from KSB’s operations are the main source of redemption for the notes, and KSB has provided an undertaking to inject additional equity or extend inter-company financing in the event of negative shareholders’ funds for SBSB.

Established under the Co-operative Societies Act 1993, KSB’s main source of revenue is derived from consumer financing. A wide range of consumer products including furniture, electrical appliances and other household products are available for its members comprising mainly civil servants. Consumer financing provided is based on the Al-Bai Bithaman Ajil principle, with repayments effected via monthly deductions of the consumers’ salaries, arranged through Biro Perkhidmatan ANGKASA, the co-operatives’ collection agency. KSB’s loan portfolio quality is viewed to be relatively good, as implied by the low level of delinquency in the public sector accounts, most of which arise from job transfers and resignations.

Revenue in FY2005 rose 55.7% to RM9.9 million (FY2004: RM6.4 million) following increased activity in consumer financing made possible through the availability of funds provided via the MMTN facility. Subsequently, operating profit margin also improved to 69.7% (FY2004: 64.1%) on the back of the increased revenue. KSB’s gearing in FY2005 climbed to 0.83x as a result of the MMTN issuances in December 2004 and March 2005. The MMTN issuances thus far, totalling RM50.0 million, constitute the main debt obligations of KSB. Lower drawdown of funds under the MMTN facility in 2005 has led to slower generation of new financing and will likely dampen KSB’s FY2006 results.

To improve its competitiveness, KSB plans to extend the maximum tenure of its consumer financing loans from four years to ten years. However, this would result in a funding mismatch as the extended loan tenure would exceed the tenure of the notes. KSB proposes to issue asset-backed securities to match its assets and liabilities more closely, and to generate new consumer financing. Under the existing terms of the MMTN facility, the outstanding notes are scheduled to be repaid in three instalments, with the first repayment of RM20.0 million due in 2009. KSB is expected to use part of the proceeds from the asset backed securities offering and available funds in the Collection Account amounting to RM23.8 million as at 31st August 2006 to redeem the RM50 million of Murabahah notes currently outstanding. MARC will withdraw its rating on the MMTN upon completion of the proposed transaction and redemption of the MMTN.