MARC has affirmed the ratings of Dura Palms Sdn Bhd’s (Dura Palms or the Issuer) RM100.0 million Series A; RM90.0 million Series B and RM10.0 million Series C Sukuk Ijarah at AAA_IS, AA_IS and A_IS respectively. The ratings affirmation of Series A and B Sukuk Ijarah reflects the quality of the collateral and the adequate performance of the securitized estates under the sale and leaseback transaction. The amortising structure of Series A and B provides for progressive reduction in loan-to-value (LTV) ratios during the tenure of the transaction. The A_IS rating of Series C reflects MARC’s affirmation of the credit rating of the originator, Teck Guan Holdings Sdn Bhd (TGHSB). Additionally, Sukukholders benefit from credit support provided by the common parent of the sellers/lessees, TGHSB by way of an irrevocable undertaking to ensure that the obligations of the sellers and Issuer are met.

Under the transaction, the Issuer purchased beneficial rights to the oil palm plantation assets of subsidiaries of TGHSB, namely Andum Sdn Bhd, Happy Valley Plantation Sdn Bhd and Teck Guan Plantations Sdn Bhd (Lessees). Dura Palms, a special purpose and wholly-owned subsidiary of TGHSB, subsequently leased the securitized assets back to the respective original sellers under an Ijarah Agreement. The transaction incorporates an asset put option to the sellers/lessees on expected maturity or upon the occurrence of a trigger event or event of default at a price equivalent to the outstanding nominal value of the Sukuk and Issuer’s expenses. The Issuer has conveyed its beneficial interest in the securitised plantation assets to the Trustee for the benefit of the Sukuk holders. In addition, the trustee has the power of attorney to sell the plantation assets to third parties in the event the sellers/lessees are unable to perfect their obligations under the asset put option.

The Ijarah rentals will form the source of payment for secondary notes of Series A, B and C Sukuk and repayment for the primary notes for Series A and B Sukuk. Since issuance, LTVs have declined by 3.9% and 3.7% for Series A and B Sukuk respectively. With actual LTVs of 22.0% (Series A) and 43.1% (Series B) on expected maturity, approximately 50% Series A and 53% Series B Sukuk totaling RM98.0 million will be funded via refinancing proceeds or proceeds from sale of the plantation properties. This represents an estimated 34.5% of the total market value of the securitized estates of RM283.9 million (based on a September 2005 valuation). Series C Sukuk is structured with a single bullet maturity falling after the maturity of Series A and B Sukuk. DSCRs for financial year ended 31 January 2007 were estimated at 4.1 and 2.1 for Series A and B respectively, above their respective minimum base case DSCRs at issuance.

The securitized plantation properties comprise a total mature area of 6,479 hectares located within the district of Sandakan and Tawau, Sabah. As at April 2007, the securitised estates consist mainly of prime mature palms (between 8 to 15 years) occupying 88% of the total planted area. In tandem with the increasing maturity profile of the securitized estates, the average FFB yield of 27.8 MT/ha exceeded MARC’s expectations and were higher than Sabah’s average yield of 24.0 MT/ha. The net operating income (NOI) was at RM24.0 million for FY2007 was slightly below the assumed sustainable NOI of RM24.99 million primarily due to higher administrative expenses of approximately 25% in comparison to the budgeted amount.

Incorporated in October 1978, TGHSB is an investment holding company with over 80 subsidiaries involved in diverse operating activities such as oil palm and cocoa plantation, oil palm milling, manufacturing, trading and others. TGHSB has an established track record in plantation operations in East Malaysia. The Group’s operating profit margin averaged 8.2% for the past five financial years (2003-2007). It’s shareholders’ funds stood at approximately RM660.8 million as at January 2007. Despite revenue increasing by 9.5% in FY2006, profit before tax declined by 39.3% to RM50.9 million (FY2005: RM83.8 million) resulting from higher input prices and operating expenses. Nonetheless, MARC notes that the Group’s cash flow from operations increased by two-fold to RM55.3 million (FY2005: 26.6 million) owing to improvements in working capital requirements. Cash flow metrics are expected to strengthen as oil palm product prices trend higher amid sustained FFB yields. TGHSB maintains the ‘A’ rating assigned at issuance.