Ample Zone Bhd - 2011 Credit Commentary Report

MARC has lowered its ratings on Ample Zone Berhad’s (Ample Zone) RM9.65 million Class B Sukuk Ijarah (sukuk) and RM75 million Class C sukuk to BB+IS and B-IS from A-IS and B+IS respectively. The outlook on the ratings remains negative. The downgrades reflect a heightened risk that upcoming payment obligations in January 2012 will be missed, based on the unsatisfactory progress to date in collateral disposal. The negative outlook incorporates substantial uncertainty over the marketability of the collateral properties and execution risks with regard to the disposal of the collateral properties, as well as the approaching payment date for the sukuk. Ample Zone is dependent on the realisation of the transaction’s collateral to meet its forthcoming January 2012 obligations on both classes of sukuk totalling RM88.5 million, of which RM84.6 million relates to principal repayments. The downgrades also takes into account Ample Zone’s continued breach of its minimum finance service cover ratio (FSCR) covenant and its Sukuk Profit Reserve Account (SPRA) balance which is significantly below required levels.

Ample Zone is a special purpose vehicle incorporated for the sole purpose of raising financing via the issuance of RM150.0 million sukuk comprising RM50.0 million Class A, RM25.0 million Class B and RM75.0 million Class C sukuk. The proceeds from the sukuk were utilised to acquire four properties which were subsequently leased back to the respective sellers, i.e. three subsidiaries of Trinity Corporation Berhad (Trinity) - formerly known as Talam Corporation Berhad - and one private company, under Ijarah Rental Agreements (IRA). Following Wisma Talam’s disposal in January 2008, the remaining properties supporting the sukuk are Menara Maxisegar, Midpoint Shopping Complex and Pandan Kapital Shopping Complex. A May/June 2006 valuation puts the collective market value of the unsold collateral properties at RM176.0 million.

MARC was recently informed by the security trustee that a trigger event had occurred as a result of the sellers’ failure to honor its obligations under the IRA. The Sukuk Trustee has exercised an option given by Trinity to compel the latter to purchase the collateral properties upon the occurrence of the trigger event. MARC notes that Trinity will only be able to discharge its obligation under the option by disposing the properties to external parties due to its strained financial profile. Trinity has appointed property consultants Henry Butcher to assist in the disposal exercise with consent of sukukholders.

A meaningful assessment of the performance of the three remaining properties backing the sukuk could not be performed due to the unavailability of information on occupancy levels, rental rates and tenant diversification. Nonetheless, based on the last confirmed balances in Ample Zone’s designated accounts, the company’s liquidity on hand is largely insufficient to cover remaining profit payments due on the sukuk.

As of July 14, 2011, the balance in the designated accounts stood at RM2.42 million, which includes balances in the SPRA of RM5,190.77; the minimum required SPRA balance is RM6.3 million. MARC estimates that the existing amounts in the designated accounts will only cover 31.28% of the remaining profit payments.

The collateral coverage provided by the remaining securitised properties based on its May/June 2006 forced-sale value of RM139.2 million is about 1.65 times of the remaining principal outstanding for both classes of the sukuk. Despite this, Ample Zone faces significant execution risk with regards to disposal of the remaining collateral properties as their liquidity is very uncertain at this point in time.

MARC will closely monitor Ample Zone’s progress toward disposing the collateral properties and take rating action where warranted.