Tradewinds Plantation Capital Sdn Bhd - 2009

MARC has affirmed its AAAIS and AA+IS ratings on Tradewinds Plantation Capital Sdn Bhd’s (Tradewinds Capital) asset-backed RM180 million Class A and RM30  million  Class  B Sukuk  Ijarah respectively, with a stable outlook. The affirmed ratings of the Class A and Class B Sukuk Ijarah reflect the satisfactory performance of the securitised plantation assets and higher-than-projected net operating income. The stable outlook on the ratings reflects expectations that the actual performance of the estates performance will remain within MARC’s assessed sustainable net operating income (NOI). Nevertheless, should CPO prices decline below the rating agency's long-term price assumption of RM1,500/MT and result in the actual NOI of the estates falling below MARC’s assessed sustainable NOI of RM42 million, downward pressure could develop on the outlook and/or the ratings.

Additionally, MARC has affirmed its MARC-1ID and MARC-1ID(bg) / AA+ID(bg) ratings on Tradewinds Capital’s  RM90 million  Murabahah Commercial Papers (Murabahah CP) and RM100 million Bank Guaranteed Murabahah Commercial Papers/Medium Term Notes (BG Murabahah CP/MTN) respectively. The outlook on the ratings is stable. The ratings of the BG Murabahah CP/MTN reflect the public information financial institution rating which MARC continues to maintain on the bank guarantor, OCBC Bank (Malaysia) Berhad, while the rating of the Murabahah CP reflects the short-term corporate credit rating of Tradewinds Plantation Berhad (Tradewinds).

Tradewinds Capital, wholly-owned by Tradewinds, was incorporated for the sole purpose of issuing RM210 million Sukuk Ijarah and RM190 million Murabahah CP/MTN. The proceeds from the Sukuk were used to purchase a pool of plantation assets - twelve estates and three palm oil mills - from Tradewinds’ nine subsidiaries (sellers/lessees). The assets were then leased back to the sellers under separate Ijarah agreements with the lease payments forming the source of repayment for the issued securities.  The proceeds from the Murabahah CP/ BG Murabahah CP/MTN were onlent to Tradewinds to part finance the development of plantations and for working capital. The lease payments match the Sukuk (i.e. principal) and return (i.e. profit) payment obligations under the Sukuk Ijarah while the Murabahah CP and BG Murabahah CP/MTN are serviced by Tradewinds directly.

The Sukuk holders have pro-rata, undivided, beneficial ownership of the trust assets (comprising the Ijarah assets, Sukuk designated accounts, rights under Ijarah agreements, Asset Put Option I, Asset Put Option II and  undertaking by Tradewinds).  Asset Put Options I and II require the sellers  or Tradewinds respectively to purchase the securitised plantation assets on expected maturity or upon the occurrence of a trigger event or event of default at a price equivalent to the outstanding nominal value of the Sukuk Ijarah and Tradewinds Capital’s expenses. At the respective Ijarah maturity dates, the sellers also have the right to exercise Call Option I requiring Tradewinds Capital to sell to them certain identified plantation properties for RM1. In the event the sellers/Tradewinds are unable to perfect their obligations under the asset put options, the trustee has the power of attorney to sell the plantation properties to third parties.

The securitised plantation estates, located in Johor, Terengganu and Sarawak, have a total planted area of approximately 18,325 ha, of which 91% is matured. In 2009, FFB production for the securitised estates stood at 311,026 MT (2008: 306,904 MT) and NOI of RM76.0 million, which is 81% higher than MARC’s computed stabilised NOI of RM42.0 million. Actual NOI was higher due to CPO prices that continue to be above MARC’s assumed long-term CPO price, which has offset the lower-than-projected FFB production and higher-than-projected operating expenses. The securitised palm oil mills continued to operate above capacity, with all mills registering utilisation rates of above 100% in 2009.

MARC's assessed sustainable NOI of RM42.0 million and discounted cash flow valuation on the securitised assets of RM112.5 million remain unchanged from a year ago following the rating agency's review of the actual performance of the estates during the review period and projected performance beyond 2009. Stressed debt service coverage ratios under various stress test scenarios, including a lower CPO price of RM1,300 per MT and a 20% decrease in FFB production remain consistent with ratings of the Class A and Class B Sukuk Ijarah. Serial redemption commencing in 2010 will reduce actual loan-to-value ratios for the Class A and B Sukuk Ijarah and provide higher collateral backing over time.

Tradewinds reported sharply lower unaudited pre-tax profit of RM78.2 million (FY2008: RM199.8 million) for the year ended December 31, 2009 (FY2009). The weaker financial performance was attributed to a revenue decline caused by lower CPO and palm kernel prices and losses incurred by a jointly controlled entity. Tradewinds' reported unaudited operating cash flow (CFO) was 53% lower year-on-year at RM148.5 million. The lower CFO coupled with earlier and continuing heavy capital investments left the company with about RM56.4 million in cash and cash equivalents as at end-FY2009, with short-term debt obligations of RM413.6 million. MARC expects Tradewinds to have adequate financial flexibility to address its debt service obligations, capital commitments and operating requirements. At the same time, MARC draws comfort from the fact that Tradewinds' acquisition funding needs with respect to Mardec Berhad, a rubber-based processing, trading and manufacturing company, may be staggered.  Of its total purchase consideration of RM150 million, 30% would be payable upon completion date, and the balance payable any time within nine months of the completion date. MARC believes that downside risks associated with the acquisition should be mitigated by Tradewinds' proven track record in consolidating and integrating past acquisitions successfully.

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