ABS Logistics Bhd - 2010

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. ALB is a bankruptcy remote special purpose vehicle incorporated to facilitate the issuance of the Sukuk and the sale and leaseback of industrial warehouses by Tiong Nam Logistics Holdings Berhad (Tiong Nam) and its subsidiaries. The monthly lease or ijarah payments form the source of profit payments on the rated Sukuk and principal repayment of the amortising Class A Sukuk.

The affirmed ratings of the Class A and Class B asset-backed Sukuk are premised on the continued satisfactory performance of the industrial warehouses backing the Sukuk during the review period (April 2009 to March 2010). The rating is further supported by the protective structural features of the transaction and relatively low loan-to-values (LTV) for each of Class A and Class B Sukuk with respect to the quality of the collateral. The stable outlook on the ratings anticipates that actual net operating income (NOI) generated by the collateral will remain broadly within MARC’s expectations. Meanwhile, the rating of the Class C Sukuk is based on the unconditional and irrevocable guarantee from Malayan Banking Berhad on which MARC maintains a public information financial institution rating of AAA/stable. The RM44.5 million Class D Sukuk (Mezzanine Sukuk) and RM95.5 million Class E Sukuk (Subordinated Sukuk) are not rated.
 
The collateral pool currently comprises 22 industrial warehouses acquired from Tiong Nam and its subsidiaries and leased back to Tiong Nam Logistics Solutions Sdn Bhd, a wholly-owned subsidiary of Tiong Nam, for a period of up to 10 years. One of the securitised warehouses, PLO117, had been disposed in April 2009, leaving 22 warehouses with a combined floor area of 1.13 million square feet. The warehouses are strategically located in established industrial areas across seven states in Peninsular Malaysia. The remaining collateral assets continue to demonstrate stable performance during the review period; the average occupancy rate held up at about 90% while average rental rates were higher compared to the previous year’s corresponding period. Consequently, ALB’s actual NOI of RM16.0 million came in RM1.5 million higher than MARC’s assumed stabilised NOI of RM14.5 million. This resilient performance was achieved notwithstanding an overall decline in domestic industrial logistics activity in 2009. The performance of the properties continues to be in line with MARC’s assumed stabilised NOI for the five-month period ending August 2010.

To date, RM15 million of Class A Sukuk has been redeemed, leaving RM85 million of principal outstanding. The amortising structure of the Class A Sukuk reduces refinancing risk over time. Taking into account the RM16 million net sale proceeds from PLO117 which has been captured in the Sukuk’s collection account, LTV ratios for the Class A and Class B Sukuk are now projected to drop to 24.9% and 37.4% at maturity from 53.0% and 65.4% as of August 2010 respectively. Including proceeds from sale of the warehouse, MARC estimates ALB’s debt service coverage ratio (DSCR) to be at 4.1 times (x) and 3.8x for the Class A and Class B Sukuk respectively as of November 2010, which are higher than the minimum DSCR requirement for the respective rating levels. As of September 2010, the total balance in the designated accounts amounted to RM28.8 million, which is more than sufficient for ALB to service its November 2010 profit payments for Class A to Class C Sukuk. To address repayment of the Sukuk’s unamortised principal at maturity date, the transaction structure also allows for the repurchase of the properties via a call option exercised by the lessee or an outright sale of the properties to third parties prior to the final legal maturity of the Sukuk.

Listed on the Main Board of Bursa Malaysia since 1992, Johor-based Tiong Nam is a leading integrated logistics provider. The group has been streamlining its operations and implementing cost-cutting measures to improve its efficiency and alleviate the impact of market risk over the last two financial years. Tiong Nam reported weaker first quarter results for the three-month period ended June 2010 (1QFY2011) due to increased competition. The group continues to rely on its operating cash flow (CFO) and committed credit facilities to support its ongoing operational liquidity needs. MARC opines that during the review period Tiong Nam’s capacity to service the Sukuk was adequately supported by the performance of the collateral warehouses. Nonetheless, the rating agency notes Tiong Nam’s continued appetite for growth and corresponding capital investments to expand its property letting and warehousing business which will likely limit free cash flow generation and improvement in its overall credit profile. Despite the fact that Class A and Class B Sukuk are asset-backed classes, a change in Tiong Nam’s rating might impact on the ratings of Class A and Class B Sukuk on the basis that actual NOI generated by the collateral can be lower than Tiong Nam’s ijarah rental obligations under certain circumstances, including lower-than-projected occupancy levels, making the transaction’s performance dependent on Tiong Nam’s ability to cover the shortfall in collateral property income. Any deterioration in Tiong Nam’s credit quality will warrant a reassessment of MARC’s ratings on Class A and Class B Sukuk.

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