CREDIT ANALYSIS REPORT

Berjaya Land Bhd - 2009

Report ID 3510 Popularity 1824 views 82 downloads 
Report Date Jan 2010 Product  
Company / Issuer Berjaya Land Bhd Sector Property
Price (RM)
Normal: RM500.00        
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Rationale

MARC has affirmed its A rating on Berjaya Land Berhad's (BLand) Secured Exchangeable bonds due 2011. Concurrently, MARC has revised the rating outlook from developing to stable to reflect reduced liquidity concerns with the expiry of bond put options substantially unexercised. The current outstanding principal amount is RM711 million, reduced from RM882.0 million since MARC's last rating action in May 2009. The stable rating outlook also incorporates anticipated improvement in the performance of its non-gaming operations, a continued strong earnings outlook for its subsidiary, Berjaya Sports Toto Berhad (BToto), and the value of the bonds' collateral package.

The exchangeable bonds are rated above BLand's standalone profile on account of the strong collateral protection that is afforded by pledged shares of its gaming subsidiary, BToto. BLand and its related parties have a 52.67% interest in BToto as of November 30, 2009. The affirmed rating also considers BLand's adequate debt servicing ability and satisfactory financial position. BLand's debt servicing ability continues to be strongly linked to BToto's dividend paying capacity and the latter's strong competitive position in the numbers forecast segment of the domestic gaming industry.

BToto's consistent profitability is reflected by its financial performance for the financial year ended April 30, 2009 (FY2009) pre-tax profit grew 16.5% to RM585.5 million. BToto maintained a strong operating performance in 1HFY2010, reporting a pre-tax profit of RM289.6 million. At BLand, consolidated pre-tax profit for 1HFY2010 was lower at RM232.8 million. BToto's large dividend payouts have been shoring up BLand's cash flow and liquidity in recent quarters amid the weaker performance of the latter’s other operating subsidiaries. The performance of BLand group's property development and leisure operations were notably affected by the more challenging economic conditions in 2009.

The bonds are exchangeable into BToto ordinary shares at an exchange price of RM5.049 per share, which was last reset on August 17, 2009. As of October 31, 2009, underlying the exchangeable bonds are 242,302,097 ordinary shares of BToto which BLand has pledged as security for the issuance. Before the final reset date of August 15, 2010, exercise of the exchange option will be dependent on BToto's share price rising above the exchange price, which MARC views as uncertain. On January 8, 2009, BToto's closing share price was RM4.37 with a 12-month low of RM4.11. The final exchange price to be fixed in August 2010 should have a significant bearing on bond conversions in the subsequent 12-month period prior to bond maturity. The bonds are redeemable at their principal amount on maturity date.

MARC believes that BLand should be in a position to procure refinancing of its rated debt in the event a substantial portion of bonds are not redeemed or exchanged prior to maturity. BLand's stake in BToto, its moderate debt to equity and significant annual dividend income flow provide BLand with good financial flexibility in addition to its cash balances. In the event BLand is unable to redeem outstanding bonds from internally generated cash flow and through debt refinancing and/or asset sales, bondholders still have recourse to the pledged BToto shares. The minimum collateral coverage of 130% against the nominal value of the outstanding bonds that BLand is required to maintain in the form of BToto shares and cash ensures a high likelihood of full repayment on the bonds.

Rating stability is supported by the expectation that business conditions will improve in 2010 and that BLand will maintain adequate financial flexibility. Should BLand elect to redeem the rated obligations, MARC expects BLand to initiate timely refinancing of the bonds.

Major Rating Factors

Strengths

  • Steady financial performance of its gaming subsidiary underpins the issue structure; and
  • High collateral cover provides strong buffer against the nominal value of the exchangeable bonds;

Challenges/ Risks

  • Potential changes in government regulations on gaming;
  • Market risk arising from price volatility of BToto shares; and
  • Property and hospitality divisions continue to face challenging conditions.

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