Tradewinds Plantation Capital Sdn Bhd - 2007

Under this transaction, Tradewinds Plantation Capital Sdn Bhd (TPCSB), a special purpose company and a wholly-owned subsidiary of Tradewinds Plantation Berhad (TPB) has been incorporated for the sole purpose of owning and leasing plantation assets for the benefit of the Sukuk holders under the RM210.0 million Sukuk Ijarah; as well as issuing RM90.0 million Murabahah Commercial Papers (CPs); and RM100.0 million Bank Guaranteed Murabahah Commercial Papers/Medium Term Notes Programme (BG CP/MTN) (CPs and BG CP/MTN collectively referred to as Murabahah CP/MTN). MARC has assigned ratings of AAAIS and AA+IS to the asset-backed RM180.0 million Class A and   RM30.0  million  Class  B   Sukuk  Ijarah   respectively;  MARC-1ID   to   RM90.0  million  CPs;  and

MARC-1ID(bg)/AA+ID(bg) to RM100.0 million BG CP/MTN. The ratings of Class A and Class B Sukuk Ijarah reflect the quality of the securitised plantation assets; the structural protections incorporated into the transaction; loan-to-value ratios (LTVs) for Class A and B which commensurate with their rating levels; and an irrevocable undertaking provided by TPB (short-term rating of MARC-1) to provide sufficient funds to ensure the lessees meet their periodic lease payments.   The rating of the CPs reflects the short-term corporate credit rating of TPB whereas the ratings of the BG CP/MTN reflect the implied financial institution rating of the bank guarantor, OCBC Bank (Malaysia) Berhad.

Under the sale and leaseback transaction, the proceeds from the Sukuk Ijarah will be used to fund the purchase of certain identified plantation estates and palm oil mills from nine subsidiaries (sellers and/or the lessees) of TPB.  Subsequent to the purchase, TPCSB will lease back the plantation properties to the sellers under separate Ijarah agreements for tenures ranging from three to nine years. The lease payments (backed by an irrevocable undertaking by TPB) match the Sukuk (i.e. principal) and Return (i.e. profit) payment obligations under the Sukuk Ijarah. The Murabahah CP/MTN which represents a credit-linked class will be serviced by TPB directly. The Sukuk holders will have pro-rata undivided beneficial ownership of the trust assets (comprising the Ijarah Assets, Sukuk designated accounts, rights under Ijarah agreements, Asset Put Option I, Asset Put Option II and undertaking by TPB). In addition, the Sukuk Ijarah has the benefit of a first fixed legal charge over the securitised plantation properties whilst the Murabahah CP/MTN has second legal charge.

The securitised portfolio comprises twelve estates and three mills located in Johor, Terengganu and Sarawak. The securitised estates have a total planted area of approximately 19,042 ha or 95.4% of the total land area of 19,962 ha. Total FFB production for the securitised estates has been on an increasing trend since 2002 in line with the increasing maturity profile of the oil palm trees. For 2006, average FFB yield increased to 18.4 MT/ha from 16.7 MT/ha in the previous year. There exists an upside in FFB yields going forward given that 35.6% and 27.5% of the planted area comprises oil palms in their prime-matured and young-matured age bracket respectively. In addition, a sizeable 17.6% of the planted area comprises immature palm trees which will make meaningful contributions to the cash flow stream in the medium term. In 2006, all three mills had utilisation rates exceeding 100%. The amount of FFB processed annually has consistently risen since 2002 in tandem with the increase in FFB production which is mirrored in the steady growth in CPO and PK production.

The Sukuk Ijarah and Murabahah CP/MTN amortises annually commencing at the end of Year 3 and Year 4 respectively.  The transaction incorporates Asset Put Options I and II which requires the sellers and TPB respectively to purchase the securitised plantation assets 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 Ijarah and TPCSB’s expenses. The sellers will have the right to exercise Call Option I which requires TPCSB to sell certain identified plantation properties to the sellers for RM1 at the respective Ijarah maturity dates with the sale being subject to specified maximum LTV ratios (post sale) of 15% for Class A and 25% for Class B. This ensures that the collateral value backing the outstanding Sukuk Ijarah remains consistent with the assigned ratings. Based on the scheduled amortisation of the Sukuk Ijarah, MARC expects the call option to be exercised, at the earliest, after year 5.  Call Option II which requires the trustee to sell the plantation properties to TPB at RM1, can only be exercised in the event that the Sukuk Ijarah has been paid in full and Call Option I is not exercised. In the event the sellers/TPB are unable to perfect their obligations under the asset put options, the trustee has the power of attorney to sell the plantation properties to third parties.

MARC’s assessed capital value of the securitised properties (estates and mills) is RM450.4 million and LTVs of 40.0% and 47.0% were applied for the tranching of Class A and B Sukuk Ijarah respectively.  With serial redemption commencing in the third year, actual LTVs for Class A and B Sukuk Ijarah will reduce and thus provide higher collateral backing for the Sukuk Ijarah over time. The debt service coverage ratios appear reasonably resilient under various stress test scenarios including lower prices of crude palm oil products and lower FFB production.

Since the completion of its merger in March 2006 with Johore Tenggara Oil Palm Berhad (JTOP), TPB registered a profit before tax of RM14.1 million in FY2006 on the back of RM361.1 million of revenue. TPB’s third quarter results ended 30 September 2007 showed an increase in revenue of 84.4% to RM431.6 million while generating a pre-tax profit of RM82.9 million (3QFY2006: RM3.9 million). Accordingly, TPB’s operating margin rose to 23.7% during the period which is more in line with its plantation peers. The improvement in TPB’s profitability reflects the prevailing high prices of crude palm oil coupled with the increasing maturity profile of TPB’s estates, as well as synergistic benefits derived from its ongoing integration initiatives with JTOP.