Legolas Capital Sdn Bhd - 2010

MARC has affirmed the ratings of MARC-1(bg) / AAA(bg) on Tranche A of Legolas Capital Sdn Bhd’s (Legolas) RM105.0 million Commercial Paper/Medium Term Notes (CP/MTN) Programme and MARC-1(bg) / AA+(bg) on Tranche B RM110.0 million CP/MTN Programme. The ratings carry a stable outlook. Legolas is a special purpose issuing vehicle established for the sole purpose of raising funds for the development of an integrated commercial project, 1 Mont’ Kiara, on behalf of Ireka Land Sdn Bhd (ILSB). The repayment of debt incurred by ILSB to fund the project, including the advances taken from Legolas, is primarily dependent on the present and future sale proceeds from the project, which was fully completed in August 2010.

The affirmed ratings reflect MARC’s AAA/MARC-1/stable public information financial institution ratings on Malayan Banking Berhad (Maybank) and AA+/MARC-1/stable public information financial institution ratings on United Overseas Bank (Malaysia) Berhad (UOBM) which have unconditionally and irrevocably guaranteed Tranche A and Tranche B of the CP/MTN programme respectively. MARC’s rating on Maybank reflects its entrenched market position as the largest commercial bank in Malaysia, strong financial profile with adequate capitalisation, healthy asset quality and resilient recurring earnings stream from its geographically diversified banking business. The affirmed ratings for UOBM are premised on the bank’s improved asset quality, good profitability, adequate capitalisation and fairly strong banking franchise in its target market segments.

Since MARC’s last rating action in December 2009, Ireka Land Sdn Bhd (ILSB) has signed (two separate) sales and purchase agreements with the wholly-owned subsidiaries of Ara Asia Dragon Fund (AADF) to sell the retail mall and 20-storey office tower components of the project for RM333 million. AADF is a private real estate fund managed by Ara Asset Management, a member of the Cheung Kong group. MARC was informed that the certificate of occupation for the development has been issued on November 25, 2010 with the sales proceeds expected to be received by end-December 2010. MARC believes that the RM333 million proceeds from the sales will put ILSB in a position to repay the advances taken from Legolas in full. The third component of the development is a 34-storey building consisting of 186 business suites which has been fully sold to individual buyers.

Legolas is an 85.1%-owned subsidiary of Aseana Properties Limited (Aseana), a UK-listed property development company. MCDF Investment Pte Ltd, a company linked to Singapore-based CapitaLand Limited (CapitaLand), holds the balance 14.9% stake. Legolas has advanced the proceeds raised from the  issuance of the notes to ILSB, a wholly-owned  subsidiary of  Aseana, for  which it  receives  interest payments that are equal to the interest payable on the CP/MTN Programme. As of March 31, 2010 (FY2010), the amount owing by ILSB to Legolas stood at RM221.6 million, including accrued interest of RM6.2 million (FY2009: RM168.22 million). The sales proceeds from the retail mall and 20-storey office tower will be used to meet the substantial remaining maturities under the rated programme of RM112 million in 2011 and RM63 million in 2012. The sales proceeds from the 34-storey building have been utilised for ILSB’s working capital. In the event the sale is not concluded by end-2010, MARC draws comfort from the balance of RM29 million in the designated accounts for the facilities as at end-August 2010 which substantially covers the upcoming RM30 million note maturities in March 2011.

The focus of MARC’s subsequent rating reviews would be on the progress of property sale transaction. Notwithstanding the execution risk associated with the sale transaction and the corresponding implications for Legolas’ debt service capacity, noteholders are insulated from the aforementioned risks by virtue of the guarantees provided by Maybank and UOBM. Any changes in the assigned ratings will be primarily driven by changes in the banks’ credit strength.

Major Rating Factors

Strengths