ABS Logistics Bhd - 2008

MARC has affirmed the ratings of ABS Logistics Berhad’s (ALB) RM100 million nominal value of Class A, RM20 million nominal value of Class B and RM40 million nominal value of Class C Senior Sukuk Ijarah at AAAIS , AAIS and AAAIS(bg), respectively. The ratings of Class A and B Senior Sukuk Ijarah reflect the quality and diversity of the collateral properties, liquidity support provided by a non-amortising reserve account, and relatively low actual loan-to-values (LTVs) for Class A and Class B Senior Sukuk Ijarah. The transaction has been structured such that 60% of the RM100.0 million Class A Senior Sukuk Ijarah is to be paid down during its tenure. The amortising structure significantly reduces refinancing risk with LTVs for Class A and B Senior Sukuk Ijarah projected to be at a low 25.3% and 37.9% respectively at maturity. Since MARC’s initial rating in April 2007, RM5.0 million Class A-1 of Class A Senior Sukuk has been redeemed in full. In the case of Class C Senior Sukuk, the ratings reflect MARC’s public information financial institution rating on its guarantor, Malayan Banking Berhad. 

ALB is a bankruptcy remote special purpose vehicle that was incorporated to acquire properties from Tiong Nam Logistics Holdings Berhad (Tiong Nam) and its subsidiaries. ALB issued RM160.0 million nominal value Class A, Class B and Class C Sukuk Ijarah (Senior Sukuk) with the balance RM44.5 million nominal value of Class D Sukuk Ijarah (Mezzanine Sukuk) and RM95.5 million nominal value Class E Sukuk Ijarah (Subordinated Sukuk) were from the unrated component of the Sukuk (Senior Sukuk, Mezzanine Sukuk and Subordinated Sukuk are referred to as Sukuk). From the proceeds, ALB paid RM191.5 million for the acquisition and subsequently entered into an Ijarah agreement with Tiong Nam Logistics Solutions (TNLS) (the lessee), a wholly-owned subsidiary of Tiong Nam, to lease the properties for a period of up to ten years.

Profit and principal repayment of the Sukuk are funded by monthly Ijarah rentals made by TNLS during the tenure of the transaction as well as the proceeds from either the repurchase of the properties via a call option exercised by the lessee or sale of the properties to third parties prior to the final legal maturity. The call option  effectively grants TNLS the right to purchase some or all of the properties from

ALB at any time between the 120th day preceding the fifth anniversary until the 90th day preceding the ninth anniversary of commencement of the lease.  The exercise price of the option will be the higher of the fair market value of the properties and the aggregate amount required to redeem all the outstanding Senior Sukuk and any accrued profit.

Located in established industrial areas in seven states in Peninsular Malaysia, the collateral portfolio is made of 23 industrial warehouses with a combined floor area of 1.24 million square feet. The current occupancy rate is estimated at 82.7%; and ALB has collected total Ijarah rentals of RM14.2 million during the period under review. The collateral is exposed to moderate concentration risk with top ten tenants contributing just 32.0% of total rental revenue in financial year ended March 31, 2008 (FY2008). As of May 2008, the balance of the collection account and reserve account stood at RM2.3 million and RM3.6 million, respectively, which is sufficient for ALB to service its next coupon payment due in November 2008. MARC estimates ALB’s debt service coverage ratio (DSCR) to be 6.2 times and 3.3 times for Class A and Class B Senior Sukuk, respectively, comfortably higher than the minimum DSCR requirement for their respective rating levels.

Listed on the Main Board of Bursa Malaysia since 1992, Tiong Nam is a leading integrated logistics provider offering a diverse range of transport related services. The group registered a higher turnover and a pre-tax profit of RM265.8 million and RM9.2 million respectively in FY2008, attributed to increased transportation activities and higher demand for warehousing and storage services. With borrowings pared down with part of the issue proceeds, Tiong Nam’s debt-to-equity improved from 1.34 times in FY2007 to a comfortable 0.68 times in FY2008.

Strengths

• Sizing of rated sukuk classes ensures relatively low actual loan-to-value (LTVs) ratios;
• Scheduled amortisation structure will result in a significant proportion of Senior Sukuk being retired during the tenure;
• Liquidity support provided by a non-amortising reserve account and;
• Quality and diversity of the properties supporting the transaction.

Weaknesses

• Lower economic growth may affect occupancy of securitised industrial properties.