Ample Zone Bhd - 2008

MARC has upgraded the rating of Ample Zone Berhad’s Sukuk Al-Ijarah (Sukuk) Class B of RM13.3 million from AIS to AA+IS and affirmed the rating of the RM75.0 million Class C Sukuk at BB-IS. The rating upgrade of Class B Sukuk reflects improvement in collateral value backing the Sukuk following the recent full redemption of Class A Sukuk as reflected in a significantly lower loan-to-value (LTV) ratio for Class B Sukuk and the credit support provided by funds in the Sukuk Profit Reserve Account (SPRA). The rating of credit-linked Class C Sukuk continues to reflect the strained financial position of Talam Corporation Berhad (TCB).

Under this Ijarah sale-and-leaseback transaction, Ample Zone Berhad (AZB), a special purpose vehicle, incorporated solely to undertake this securitisation exercise, acquired four buildings comprising of Menara Maxisegar (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). The Assets were leased back to the Sellers (also the lessees) in return for periodic rental payments. TCB and/or the Sellers have provided a unilateral, unconditional and irrevocable option/undertaking to AZB to purchase the Assets. Approximately 22.0% of Class A and 36.0% of Class B Sukuk will be amortised prior to year 7, the year in which final redemption occurs.

The disposal of WT to Hospital Pantai Indah Sdn Bhd was completed in January 2008 for RM63.5 million. The full purchase price of RM63.5million was received by Trustee in November 2007 but all the conditions precedent in respect of the proposed disposal as stipulated in the Sales & Purchase Agreement dated 19 April 2007 have been fulfilled in January 2008, of which the nett proceeds were utilized to fully redeem Class A Sukuk and partially redeem RM9.5 million of Class B Sukuk. Following the early redemption, the LTV ratio for outstanding RM13.3 million Class B Sukuk improved to 19% (2007: 48%). Although the revised LTV falls within target LTV for the AAA rating level, the current performance of the property collateral continues to be affected by non payment of rental by TCB group, as reflected in outstanding rental collections totaling RM13.3 million at end December 2007. This has resulted in reliance on the SPRA to meet the profit payments. Additionally, TCB’s weak corporate credit rating at BB- and continuing failure to meet its lease obligations imply heightened uncertainty as to its capacity to honour its purchase undertaking. Offsetting this risk is Class B Sukuk’s final principal redemption of RM9.7 million in 2012 which only represents 7.0% of the total forced sale value of the remaining Assets.

During the period under review (February 2007 to January 2008), the total net operating income (NOI) was approximately 11.9% lower than FY2006 mainly due to the increase in operating expenses by 75.7% and continued shortfall in rental income from Menara Maxisegar. Nevertheless, MARC notes that the occupancy rates and average rental rate of the Assets have remained stable.

Following the full redemption of Class A and a portion of Class B, AZB’s debt obligations (inclusive of profit and capital payments) have been reduced by 39.8%. Based on NOI achieved in 2007 and continued non payment of rental by TCB, MARC expects profit payment shortfalls arise on Class C Sukuk from January 2010 onward. As such, the funds in the SPRA will have to be utilized. Continued utilisation of the SPRA will result in a technical breach in January 2011, as the expected NOI would be insufficient to replenish the SPRA within the prescribed two-month cure period. Final redemption of Class B and C Sukuk is contingent upon the sale of MM, PK and MP. Proceeds from assets sales will be sufficient to satisfy the Class B and Class C Sukuk obligations at final redemption in 2012 based on the aggregate outstanding Sukuk of RM84.7 million and 2006 ‘forced sale’ valuation of RM139.2 million for the three properties. The ratings could be raised in the event of further asset sales and/or rental collection problems are resolved.