Dura Palms Sdn Bhd - 2009

MARC has affirmed the ratings of Dura Palms Sdn Bhd’s (Dura Palms) RM100 million Series A, RM90 million Series B and RM10 million Series C Sukuk Ijarah at AAAIS, AAIS and AIS respectively. The ratings carry a stable outlook. The affirmed ratings of the Series A and Series B Sukuk reflect the strong performance of the securitised estates, augmented by strong fresh fruit bunches (FFBs) prices during the period under review and the structural protections incorporated in the transaction. This transaction provides Dura Palms the option to put the securitised estates to the sellers/lessees on expected maturity date, the proceeds of which will be the main source of repayment for the Series C Sukuk.   The affirmed rating of Series C therefore reflect the affirmed credit rating of Teck Guan Holdings Sdn Bhd (Teck Guan) as the holding company of the sellers/lessees of the securitised assets, given Series C’s dependency on Teck Guan’s ability as the holding company to source for funds to meet the obligation under the put option exercise.

Dura Palms, which is wholly-owned by Teck Guan, is a special purpose company formed to purchase the beneficial rights to the oil palm plantation assets of its holding company’s three subsidiaries, Andum Sdn Bhd, Happy Valley Plantation Sdn Bhd and Teck Guan Plantations Sdn Bhd (the sellers/lessees), and subsequently lease the securitised assets back to them under an Ijarah Agreement. The source of payment for secondary notes and repayment of primary notes of the sukuk will be from the semi-annual Ijarah payment made by the sellers/lessees to Dura Palms and proceeds from the asset put option to the sellers/lessees on expected maturity date. The Trustee of the transaction has the power of attorney to sell the securitised assets if the sellers/lessees fail to perfect their obligations under the asset put option to redeem the sukuk. In addition, sukukholders benefit from liquidity support from Teck Guan through its irrevocable undertaking to ensure that the obligations are met on a timely basis.

As of October 2009, the loan-to-value (LTV) for Series A and Series B Sukuk improved to 31.0% and 60.1% respectively (October 2008: 34.1%, 65.5%), following the timely principal redemption totalling RM35 million since closing of the transaction. Improvements in the LTV ratios were also attributed to the upward revision in the discounted cash flow valuation of the transaction in 2008, which has resulted in higher LTV of RM258 million from RM227.2 million on closing date. The LTV at closing for Series A and B Sukuk, which are now projected to be 38.8% and 73.6% respectively (initial rating: 44% and 83.6%), remain within the respective rating levels.

The amortising structure of Series A and B Sukuk provides for progressive reduction in LTV level that translates into increased credit support over time. At maturity, Series A, B and C Sukuk totalling RM98.0 million will be either refinanced through the asset put option mechanism or settled with the proceeds from the sale of the plantation properties comprising 6,861 hectares located within the districts of Sandakan and Tawau, Sabah. The estates were valued at RM283.9 million as at September 2005. At maturity, this amount represents only about 34.5% of the total market value, affording considerable comfort.  Series C Sukuk Ijarah is structured with a single bullet maturity falling after the maturity of Series A and Series B Sukuk.

Dura Palms’ plantations continued to demonstrate strong cash flow generating ability during the 12 months ended January 31, 2009 (FY2009). To date, the securitised estates comprise a mature planted area of 6,484 hectares, of which 71% are from the highest-yielding category aged between 8 to 15 years, with the remainder aged between 16 to 20 years. The securitised estates’ average FFB yields were consistently higher than Sabah’s average yield over the last seven years. Underpinned by strong FFB prices, the securitised estates continued to generate strong net operating income (NOI) of RM57.1 million (FY2008: RM53.6 million). This was reflected in the strong finance service coverage ratios for Series A and B Sukuk Ijarah estimated at 7.00 times (x) and 3.34x respectively. Nonetheless, MARC notes a substantial increase in operating costs mainly due to high fertiliser prices. The average upkeep and maintenance costs for the securitised estates increased by a substantial 81% to RM2,858/ha  (FY2008: RM1,580/ha) during the period under review. Given the largely non-discretionary nature of this element of operating cost, MARC acknowledges the risk of lower-than-projected NOI should FFB prices fall below their current level.

In FY2009, Teck Guan’s credit metrics remained in the A rating category, mainly supported by its improved earnings fundamentals and stable debt leverage position. The group posted a net profit after tax of RM115.5 million (FY2008: RM86.7 million) on the back of RM1.65 billion (FY2008: RM1.5 billion) in revenue. OPBIT interest coverage in FY2009 increased to 6.2x from 5.9x recorded in FY2008, while debt leverage remained somewhat stable at 0.7x despite the increase in short-term debt funding by RM217.1 million in FY2008. Meanwhile, its cash flow protection measures remained weak in FY2009 due to growth-related capital investments in an oleo chemical plant in China. Whilst the expansion in China into the oleo chemical (refining CPKO) operations should benefit its financial profile in the longer run, the near-term credit implication has been an increased reliance on credit facilities to refinance due debt obligations and to finance expansion in China.

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