ABS Logistics Bhd - 2011

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 for the Class A and B Sukuk have been revised to negative from stable. The revision in outlook reflects increasing concerns on the credit profile of the transaction’s originator and lessee, Tiong Nam Logistics Berhad, due to weakening financial performance in a highly competitive business environment. The negative outlook affects RM140 million outstanding under the sukuk. The ratings of the Class A and Class B Sukuk reflect satisfactory loan-to-value (LTV) ratios for the sukuk, strong debt service coverage levels, and the steady performance of the collateral properties. Meanwhile, the enhanced rating of the Class C Sukuk is based on the unconditional and irrevocable guarantee from Malayan Banking Berhad on which MARC maintains a financial institution rating of AAA/stable based on public information.
 
ALB is a bankruptcy remote special purpose vehicle incorporated to facilitate the issuance of the sukuk and the sale and leaseback of industrial warehouses (the collateral pool) 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 collateral pool comprises 22 industrial warehouses of a collective market value of RM178.5 million (as of April 28, 2011) 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. The warehouses are located in established industrial areas across seven states in Peninsular Malaysia.

As of March 31, 2011, the collateral pool showed a healthy collective occupancy rate of 93.8% and continues to be supported by a stable base of major tenants involved in manufacturing-based and logistics- and transportation-based industries. MARC notes that a substantial number of these tenants have been customers of Tiong Nam for over 10 years, reflecting the reliability of Tiong Nam’s logistics and transportation services. In addition, the ideal locations and quality of the collateral properties has continued to meet  the business  needs of  these tenants. For these reasons, we believe there is a strong likelihood that major tenants will continue to renew their leases, which are generally short-termed in nature – the average tenure of leases in the collateral pool is currently 1.39 years. Notwithstanding, the collateral pool faces high tenant-concentration risk as five of its largest tenants now account for over 55.9% of annual gross rental revenue. Furthermore, since a substantial number of its tenants are exposed to manufacturing-based industries, particularly the electronics and electrical sector, the collateral pool’s performance is susceptible to changes in economic conditions.

During the period under review (April 2010 to March 2011), the collateral pool showed a healthy net operating income (NOI) of RM16.0 million and was able to comfortably meet all required ijarah payments of RM14.4 million in total with a gross revenue. Based on existing leases held and an average monthly rental rate of RM1.35 per sq ft, MARC expects the collateral pool to generate an NOI of RM16.0 million in the next year, against the assumed sustainable NOI of RM14.5 million. In the same period, ALB had successfully redeemed RM5.0 million of Class A sukuk on May 8, 2011, leaving the outstanding amount at RM80.0 million. As such, the respective loan-to-values (LTV) for the Class A and Class B Sukuk are 55.4% and 69.2% based on an unadjusted discounted cash flow value of the collateral pool of RM144.5 million; however, projected LTVs at maturity for the sukuk remain unchanged at 27.7% and 41.5%. Furthermore, given collection and reserve account balances (as of July 31, 2011) of RM23.0 million and RM3.9 million respectively, MARC has computed the respective debt service coverage ratios (DSCR) for the Class A and Class B Sukuk to be 3.61 and 3.31 times, lying well above the rating requirements of 2.2 and 1.9 times.

Tiong Nam showed a 7.6% increase in revenue for FY2011, supported by growth in both its business segments. However, despite revenue growth, the group’s operating performance was negatively affected by fuel, rental and labour costs, showing a weaker gross profit margin of 11.1%, down from 14.8% in the previous year. Meanwhile, the group’s profit after tax figure jumped 137.7% to RM28.8 million due to increases in fair values (almost RM31.2 million) of its investment properties. Regardless, the group’s weaker operating performance had a significant impact on its cash flow from operations (CFO), which fell to negative RM11.9 million from a positive CFO of almost RM23.0 million in the previous year. At end-FY2011, its total borrowings rose to RM172.4 million from RM132.6 million over the past year. However, its debt-to-equity ratio fell to 0.61 times from 0.64 times on an expanded revaluation reserve increasing shareholders’ funds.

Subsequently, for the period ended June 30, 2011 (6MFY2012), Tiong Nam posted higher revenues of RM75.1 million compared to RM71.9 in the corresponding prior period. However, its financial performance remained depressed as a result of operating cost burdens, reflected by a profit before tax margin of 0.33%, down from 2.36%. In line with weaker profits, the group’s CFO dwindled to negative RM8.2 million from a positive CFO of RM13.4 million. In addition, its capitalisation ratio is comparatively higher at 0.70 times due to a larger proportional increase in borrowings vis-a-vis shareholders’ funds. The group mentioned in its 6MFY2012 earnings announcement that it intends to raise freight rates to partly address its hefty working capital requirements.

To address repayment of the sukuk’s unamortised principal at maturity, the transaction structure 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.

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