Tradewinds Plantation Capital Sdn Bhd - 2010

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. Wholly-owned by Tradewinds Plantation Berhad (Tradewinds), Tradewinds Capital is a special purpose vehicle established to act as issuer of the notes and lessor in the sale and leaseback transaction of oil palm plantation assets. The affirmed ratings of the Class A and Class B Sukuk Ijarah reflect the satisfactory performance of the collateralised plantation assets and the higher-than-projected net operating income (NOI) on the back of high crude palm oil (CPO) prices during the seven-month period ended July 2010. The ratings also consider the favourable loan-to-value ratios of Class A and Class B Sukuk of 40% and 46.6% respectively. The stable outlook on the ratings reflects expectations that the actual performance of the estates will remain within MARC’s assessed sustainable NOI.

At the same time, MARC maintained its MARC-1ID(bg) short-term rating and upgraded its long-term rating to AAAID(bg) from AA+ID(bg) on Tradewinds Capital’s RM100 million Bank Guaranteed Murabahah Commercial Paper/Medium Term Notes (BG Murabahah CP/MTN) Programme. The outlook on the ratings is stable. The upgrade of the long-term rating mirrors an upgrade of MARC’s public information financial institution rating of OCBC Bank (Malaysia) Berhad (OCBCM). Notes issued under the BG Murabahah CP/MTN are fully and unconditionally guaranteed by OCBCM. The one-notch upgrade in the long-term rating reflects MARC’s revised methodology for rating domestically incorporated banking subsidiaries of foreign banks and the rating agency’s opinion of the strength of the parent/subsidiary relationship between the Oversea-Chinese Banking Corporation Limited (OCBCS) and OCBCM. The upgraded rating incorporates the financial strength of OCBCS (rated AAA/stable by MARC) and MARC’s opinion that OCBCS would have a very strong propensity to support OCBM’s operations and financial obligations on a timely basis.

MARC also affirmed its MARC-1ID rating on Tradewinds Capital’s RM90 million Murabahah Commercial Papers with a stable outlook. Unlike the Sukuk Ijarah, the Murabahah CPs and the BG Murabahah CP/MTN are not serviced from the lease rentals and cash flow generated by the plantation assets that are  funding Tradewinds Capital’s obligations under the Sukuk but are essentially direct obligations of the parent, Tradewinds. The rating and outlook on the non-guaranteed Murabahah CPs therefore mirror the affirmed short-term rating and outlook of Tradewinds. The aforementioned rating actions reflect expectations for continued improvement in credit quality as the oil palm plantation company benefits from higher CPO prices and production volumes.

The collateral plantation assets comprise 12 estates and three mills located in Johor, Terengganu and Sarawak. The plantation estates have a total planted area of approximately 17,574 ha, of which 88% is matured. For the seven-month period ended July 2010, the collateral estates produced 167,798 MT of fresh fruit bunches (2009 corresponding period: 163,692 MT) in tandem with an increase in mature planted area. The performance of the collateral estates benefited from higher CPO prices which have more than compensated for higher-than-projected operating expenses. The estates generated RM54.2 million NOI during the review period, 29% higher than MARC’s assessed sustainable NOI of RM42.0 million. The continued operation of its palm oil mills above rated capacity contributed an additional RM15.9 million NOI for Tradewinds Capital. Stressed debt service coverage ratios under various stress test scenarios, including a lower CPO price of RM1,300 per MT and 30% reduction in FFB production, remain consistent with ratings of the Class A and Class B Sukuk Ijarah. In addition, serial redemption of the Sukuk commencing December 2010 will reduce actual loan-to-value ratios for the Class A and B Sukuk and provide higher collateral backing over time.

Tradewinds reported a higher pre-tax profit of RM84.3 million for the six-month period ended June 2010 as a result of higher CPO prices coupled with a lower share of losses in a jointly-controlled entity (CPO prices averaged RM2,534 per MT during the period compared to RM2,174 per MT for FY2009). Although the improved earnings and working capital reductions have bolstered the group’s operating cash flows, continued heavy capital investment and substantial repayment of borrowings have resulted in a lower ending cash and cash equivalents of RM42.2 million as at end-June 2010, down from RM56.3 million in FY2009. Nonetheless, MARC believes that Tradewinds’ liquidity position is sufficient for its current needs; it has substantial headroom under its committed credit facilities which mitigates the refinancing risk posed by maturing debt obligations. Tradewinds’ short-term debt obligations of RM293.4 million as at end-June 2010 include RM97.0 million of term loans, RM25.0 million of scheduled amortisation of the Class A Sukuk and RM168.0 million of revolving credit facilities. Further, MARC notes that the delay in Tradewinds’ acquisition of rubber-based processing, trading and manufacturing company Mardec Berhad beyond its original target completion date of April 2010 has eased the strain on Tradewinds’ cash flow. 

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