ABS Logistics Bhd - 2009

MARC has affirmed the ratings of ABS Logistics Berhad’s (ALB) Senior Sukuk comprising  RM100 million of Class A, RM20 million of Class B and RM40 million of Class C Sukuk at AAAIS , AAIS and AAAIS(bg), respectively. The outlook on the ratings is stable. The affirmed ratings of Class A and Class B Sukuk reflect the maintenance of adequate credit enhancements that are consistent with the respective rating levels and satisfactory performance of the securitised properties that are backing this transaction. The rating of the Class C Sukuk is premised on Malayan Banking Berhad, in respect of which MARC maintains a public information rating of AAA/Stable on the bank, as the guarantor of the programme. The RM44.5 million Class D Sukuk (Mezzanine Sukuk) and RM95.5 million Class E Sukuk (Subordinated Sukuk) are not rated.
 
ALB is a bankruptcy remote special purpose vehicle that was incorporated to acquire a pool of 23 industrial properties (which collectively form the securitised properties) from Tiong Nam Logistics Holdings Berhad (Tiong Nam) and its subsidiaries, funded by issuances of the Sukuk. From the proceeds, ALB paid RM191.5 million for the acquisition and subsequently entered into an Ijarah agreement with Tiong Nam Logistics Solutions (TNLS) (the lessee), a wholly-owned subsidiary of Tiong Nam, to lease the properties for a period of up to ten years. The monthly Ijarah payments form the source of profit payments on the rated Sukuk and principal repayment of the amortising Class A Sukuk. The transaction structure also allows for the repurchase of the properties via a call option exercised by the lessee or outright sale of the properties to third parties prior to the final legal maturity of the Sukuk.

Located strategically in established industrial areas across seven states in Peninsular Malaysia, the securitised properties comprise 23 industrial warehouses with a combined floor area of 1.24 million square feet. The current occupancy rate of the warehouses is modest at about 80%, with the top 10 tenants contributing only 27.6% of total rental revenue as of March 2009, exposing the transaction to moderate concentration risk. MARC also draws comfort from the higher-than-projected net operating income (NOI) in the financial year ending March 2009 (FY2009) of RM17.9 million and RM10.9 million for the nine months ended December 31, 2009 against MARC’s assumed stabilised NOI of RM15.8 million per annum. Underpinned by continued stable rental collections, Ijarah payments were made according to schedule. In April 2009, Tiong Nam disposed of one of the securitised warehouses for RM16 million, the proceeds  of  which may be utilised for meeting future Sukuk obligations, early  partial redemption of the Sukuk or buying back outstanding tranches of the Sukuk from the market. In tandem with the smaller collateral pool, the annual Ijarah payment has been revised down to RM14.4 million per annum from FY2010. Accordingly, MARC revised its estimate of sustainable NOI down to RM14.5 million per annum, which lowered the cash flow valuation of the securitised properties to RM144.5 million from RM158.3 million previously.

Based the revised Ijarah payment and excluding proceeds from sale of the warehouse, MARC estimates ALB’s debt service coverage ratio (DSCR) to be at 2.5 times (x) and 2.3x for the Class A and Class B Sukuk respectively as of May 2010, which are higher than the minimum DSCR requirement for the respective rating levels. The high coverage mainly reflects the good performances of the securitised properties in terms of rental collections and expenses. As of December 2009, the total balance in the designated accounts amounted to RM27.3 million, which is more than sufficient for ALB to service its next Class A Sukuk redemption of RM5 million and profit payments for Class A to Class C in May 2010.

The amortising structure of this transaction reduces refinancing risk over time with projected loan-to-value (LTV) ratios of 25.3% and 37.9% for Class A and Class B Senior Sukuk respectively at maturity in 2017. To date, tranche A-1 and A-2 of the Class A Sukuk amounting to RM10 million have already been redeemed in full, resulting in LTV ratios of 56.9% and 69.5% for Class A and Class B Sukuk respectively (based on net cash flow valuation of RM158.3 million).

Listed on the Main Board of Bursa Malaysia since 1992, Johor-based Tiong Nam is a leading integrated logistics provider offering a diverse range of transport-related services. The group’s operating performance improved in the nine months ended December 31, 2009 (3QFY2009) compared to the preceding year’s corresponding period as a result of improvement in operating efficiency and successful implementation of cost reduction measures. This has translated to higher profit margin of 8.1% in 3QFY2010 from 4.4% registered in FY2009. Tiong Nam’s leverage position remained around prior year levels in 3QFY2010 with a debt-to-equity ratio of 0.68 times (x) (FY2009: 0.72x), with capital expenditure focused on maintenance of operations capacity and the logistics provider’s near-term business strategies geared towards margin enhancement and eliminating risky customers.

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