CREDIT ANALYSIS REPORT

Kwantas SPV Sdn Bhd - 2008

Report ID 3203 Popularity 1549 views 72 downloads 
Report Date Aug 2008 Product  
Company / Issuer Kwantas SPV Sdn Bhd Sector Plantations
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed the ratings of Kwantas SPV Sdn Bhd’s (Kwantas SPV) RM80.0 million Class A Sukuk and RM60.0 million Class C Sukuk at AAAID, and A+ID, respectively; the RM65.0 million corporate guarantee-backed Murabahah Commercial Papers/Medium Term Notes Programme (Murabahah CP/MTN) at MARC-1ID /A+ID; and upgraded RM15.0 million Class B Sukuk to AAAID from AAID. The rating actions follow a full annual review of the performance of the securitised plantation estates and revision of MARC’s long term CPO price assumptions. The resulting upward revision in MARC’s assessed sustainable income of the estates and collateral value affects loan-to-value ratios (LTVs) for all the three classes of Sukuk. The upgrade of Class B Sukuk is supported by its reduced LTV ratio which now corresponds to required LTVs at the ‘AAA’ rating level. The affirmed rating on Class A remains consistent in relation to the required LTV and MARC’s performance expectations. The affirmed rating on Class C Sukuk and RM65.0 million Murabahah CP/MTN, reflects the corporate credit rating of the originator, Kwantas Corporation Berhad (KCB), which MARC has maintained since issuance.

Wholly-owned by KCB, Kwantas SPV is a special purpose company incorporated for the sole purpose of owning and leasing the securitised plantation estates for the benefit of Sukuk investors as well as issuing up to RM65.0 million Murabahah CP/MTN to part-finance working capital needs of its sole shareholder.  At transaction close, Kwantas SPV acquired from the subsidiaries of KCB (sellers/ lessees) plantation estates with a total acreage of 9,047.8 ha (inclusive of non-planted area of 909 ha) and subsequently leased back the securitised assets to the seller under Ijarah Agreements with a tenure of nine years. Sukukholders, benefit from the irrevocable and unconditional undertaking from KCB (the originator) to ensure the obligations of the lessees are met on timely basis. The lease payments fund Kwantas SPV’s obligations under the Sukuk. The transaction also grants the Trustee the power of attorney to sell the plantation assets to third parties should the sellers or originator fail to redeem the securitised assets. Refinancing risk is mitigated as the structure incorporates an amortising structure commencing one year after issuance. As of August 2008, RM20.0 million of Class C Sukuk or 12.9% of the RM155.0 million Sukuk notes have been redeemed.

Financial performance of the securitised plantation estates, as a whole, has been strong, buoyed by strong CPO prices and supported by its high mature to planted area ratio. MARC’s assessed sustainable net operating income (NOI) of the estates has increased to RM28.0 million from RM24.0 million at transaction close with its upward revision of long term CPO price to RM1,500/MT from RM1,175/MT (at closing) and incorporation of higher projected operating expenses of the estates. The discounted cash flow (DCF) value of the securitised plantation estates is 16.6% up, to RM254.5 million from RM218.2 million previously. With the revised DCF value, LTV ratios for Class A, Class B and Class C Sukuk have reduced to 31.4%, 37.3% and 47.2%, respectively, compared to 36.7%, 43.5% and 55.0% at transaction close.

As of March 2008, the securitised plantation estates comprise total mature area of 7,528.1 ha, representing 92.5% of the total planted area. Of the total mature area, approximately 61.8% or 4,655.5 ha are planted with prime mature palms. The performance of the securitised plantation estates which has consistently exceeded Sabah’s and Malaysia’s average FFB yield over the past five years is expected to be sustained, going forward. In FY2007, the estates registered NOI of RM30.7 million, 27.9% higher than MARC’s assessed sustainable NOI of RM24.0 million, and 9.6% higher than the revised sustainable NOI. Unaudited NOI for the first nine months of FY2008 which was higher than anticipated, surpassed RM50.0 million.

KCB recorded growth in revenue of 73.8% to RM1.95 billion in financial year ending 31 January 2007 (FY2007), arising from the higher average selling price for its refined products as well as higher revenue contribution from its China operations. Operating profit margin more than doubled to 6.8% (FY2006: 2.8%) attributed to the strong CPO price and improved performance by its refinery division. In FY2007, KCB’s cash flow protection measures remained stable and its gearing level continues to be below one time. As of March 2008, KCB’s total planted area stood at 14,678 ha (inclusive of securitised plantation estate), of which 64.1% are planted with prime mature trees. Although MARC believes that a certain level of earnings volatility is an intrinsic part of KCB’s oil palm-related businesses, KCB is expected to demonstrate fairly good resilience to weaker CPO prices.

Strengths

  • Quality of the securitised plantation estates supporting the transaction; and
  • Relatively low loan-to-values limits commensurate with the ratings.

Challenges

  • Increasing operating expenses driven by rising fertilizer and labour costs; and
  • Unpredictable weather conditions may impact the FFB production.

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