Berjaya Land Bhd - 2008 / 2009

MARC has affirmed its ‘A’ rating on Berjaya Land Berhad’s (BLand) Secured Exchangeable Bonds, of which RM882.0 million remains outstanding currently. Concurrently, the outlook was revised to developing from stable. MARC’s revised outlook for the rating reflects increased uncertainty posed by the exchangeable bonds’ approaching put option date of August 15, 2009 and corresponding liquidity implications. MARC remains concerned that a liquidity shortfall could develop in the event that a substantial amount of the outstanding bonds are put to the company for redemption in August 2009. In particular, BLand may face challenges accessing the debt market in light of current market conditions. Mitigating this somewhat is the strong collateral coverage maintained by BLand in compliance with the terms of the secured exchangeable bonds. The minimum required collateral coverage of 130% against the nominal value of the bonds, afforded by shares in subsidiary, Berjaya Sports Toto Berhad (BToto) and cash securing the bonds, provide assurance that any outstanding indebtedness in respect of the bonds could be adequately satisfied from the realisation of the collateral. The rating outlook could be revised to stable in the event that liquidity concerns are alleviated by substantial conversion of the bonds into underlying shares and/or the put options expire substantially unexercised.

The affirmed rating reflects the continued ability of leading domestic numbers forecast operator (NFO), BToto to upstream dividends to BLand to cover debt service requirements of the rated bonds. BLand’s coupon servicing obligations are secured by a charge over a dividend cash account into which dividends received on the underlying exchange property and/or secured property, i.e. BToto shares, are paid. BToto’s dividend paying capacity continues to be a function of its strong competitive position and cashflow generating ability, tempered by its moderate debt leverage and above average exposure to regulatory risk. Operating trends were positive for the nine months ended January 31, 2009, with unaudited revenue and pre-tax profit up by 17.2% and 6.3% respectively compared to the corresponding period last year.  While net cash flow from operations (CFO) increased by 28.2% growth to  RM382.3 million, dividends  paid  declined by 26.2%, allowing  liquidity to strengthen at BToto. MARC notes that no treasury shares were acquired in recent months which should result in more free cash flow being available for dividend upstreaming should the necessity arise. BToto’s cash and cash equivalents rose to RM215.8 million as at end-January 2009 from RM180.8 million a year ago.

BLand, the issuer of the bonds, is an investment holding company with subsidiaries engaged in three core activities: vacation timeshare, hotels, resorts & recreation development; property investment and development; and gaming and lottery management. For the year ended FY2008, BLand’s CFO rose to RM985.3 million at holding company level from RM215.7 million a year ago on the back of a marked increase in dividends received. Cash inflow from dividends which rose to RM1.0 billion from RM251.0 million were more than sufficient to cover annual interest, operating expenses and dividend payments to BLand’s shareholders.

With the consolidation of BToto’s results commencing February 2008, BLand was able to report a steep increase in revenue for the nine months ended January 31, 2009 to RM3.2 billion from RM506.9 million in the previous year corresponding period. (BToto was formerly an associate company of BLand.) Group pre-tax profit, however, more than halved to RM211.6 million from RM484.8 million due to the weaker performance by its property development division, lower rental income following the disposal of certain investment properties, higher finance costs and foreign exchange losses. The group’s results were also weighed down by equity accounted losses and impairments in the value of certain quoted investments. In addition, BLand recognised a substantial exceptional gain in the previous year corresponding period from the disposal of various assets and the placement of 5% Irredeemable Convertible Unsecured Loan Stocks (ICULS) 1999/2009. MARC believes that current economic conditions could weaken recurring cashflow generation and therefore the ability of BLand’s subsidiaries to upstream consistent dividends to the holding company level. MARC will continue to monitor developments with respect to the upcoming exchange price reset date and put option date, and assess the likely rating implications.

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