Talam Corporation Bhd - 2009

MARC has assigned ratings of B+ID, B and B- to Talam Corporation Berhad's (Talam) RM134.21 million Settlement Bithaman Ajil Islamic Debt Securities (Settlement BaIDS), RM356.25 million Redeemable Convertible Secured Loan Stocks (RCSLS) and RM257.40 million Redeemable Convertible Preference Shares (RCPS), respectively. The Settlement BaIDS, RCSLS and RCPS will be issued in connection with Talam's financial restructuring plan and completion of the debt exchange offers proposed by Talam and its subsidiaries and related companies to its lenders. Accordingly, MARC has withdrawn its D ratings on Europlus Corporation Sdn Bhd’s RM350.0 million Murabahah Underwritten Notes Issuance Facility, Maxisegar Sdn Bhd’s RM250.0 million BaIDS and Ambang Sentosa Sdn Bhd’s RM272.0 million Class B and RM226.0 million Class C BaIDS. The outlook on the ratings are stable.

MARC believes that the risk of near-to-intermediate term default has been significantly reduced by the absence of Settlement BaIDS profit payments during the first three years of the Settlement BaIDS 10-year tenure and the flexibility to retire shorter-dated RCSLS and RCPS by relying on conversion of the facilities into equity upon maturity. The foregoing will provide much needed breathing space to Talam to restore its credit profile.

The Settlement BaIDS is rated the same as Talam's long-term corporate credit rating, consistent with the relatively low security cover ratio provided by the collateral package for the Settlement BaIDS. Both ratings reflect MARC's assessment of the property developer's ability and willingness to service its financial obligations on an ongoing basis. While the step-up profit payment structure of the Settlement BaIDS implicitly assumes a gradual trend of improvement to Talam's credit quality, MARC is of the view that significant uncertainty remains in relation to the levels of cashflow and earnings the property developer can generate post-restructuring.

MARC expects Talam's debt protection measures to remain weak in the near-to-intermediate term owing to the challenging business environment and its still vulnerable financial profile. Talam continues to lack financial flexibility, as indicated by its nominal liquidity and absence of borrowing capacity.

The RCSLS is rated one notch below the Settlement BaIDS, mainly on account of MARC's expectation of relatively high reliance on the conversion of the RCSLS into equity to reduce outstanding RCSLS as assumed  in  Talam's base  case financial projections. MARC's analysis of  the collateral package securing

the RCSLS, however, indicates that in the event of default or liquidation, the RCSLS holders would not be disadvantaged relative to the Settlement BaIDS holders. With the exception of tranche A of the RCSLS which has a security cover ratio of 0.44 times (based on forced sale value), the other tranches should expect more than 50% recovery in the event of default or liquidation.

The RCPS is rated two notches below Talam's long-term corporate credit rating to reflect its junior position in right of payment relative to Talam's other secured debt in the event of liquidation. MARC expects the entire RCPS issuance to be converted into equity upon maturity as provided for in the Talam's base case financial projections.

The stable outlook reflects the assumption that Talam's performance in coming quarters will be broadly in line with its projections. The future direction of assigned ratings will be driven by Talam's progress in improving its business and financial risk profile, as well as overall improvement in its operating environment. Further improvements in the ratings will depend on Talam's ability to achieve a sustainable turnaround in earnings performance.

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