Riverson Corporation Sdn Bhd - 2012

MARC has affirmed its ratings of MARC-1(fg)/AAA(fg) on Riverson Corporation Sdn Bhd’s (Riverson) RM200 million CP/MTN facility with a stable outlook. The affirmed ratings and outlook reflect the unconditional and irrevocable financial guarantee on the rated programme by Danajamin Nasional Berhad (Danajamin), which has a rating of AAA/stable from MARC. Danajamin’s rating is underpinned by its important role as Malaysia’s first and sole government-sponsored financial guarantee insurer, its solid capital base and ample liquidity.

Kota Kinabalu-based Riverson is currently undertaking its first property development project consisting of a 9-storey hospital with 200 beds and an adjoining 10-storey commercial block on a 5.4-acre site. The construction, which is at a nascent stage, is to be part-funded progressively from the proceeds from the issuance under the rated programme. As of date, RM50 million notes have been issued for the construction, which is expected to be completed by August 2014.

MARC notes that WCT Construction Sdn Bhd (WCT Construction), a member of one of the largest domestic construction groups, WCT Berhad (WCT), is undertaking the construction. Additionally, technical support for the hospital construction is provided by GEH Management Sdn Bhd (GEHM), a wholly-owned subsidiary of Parkway Holdings Limited, which owns one of the largest private hospital chains in the region. On completion of construction, GEHM will operate the hospital, tentatively known as Gleneagles Kota Kinabalu Medical Centre (GKKMC), under the “Gleneagles” brand. MARC views that the involvement of WCT as the main contractor and GEHM at the onset of the hospital construction would mitigate construction and completion risk associated with the project. 
 
Nonetheless, MARC remains concerned about the sales prospects for the commercial block given the moderating outlook for the domestic property sector. The commercial block, which has total gross development value of RM426.1 million, consists of retail space (247 retail lots), small office/home office (SOHO) (152 units), and office suites (30 units). The first phase of the commercial development has been launched with modest sales recorded thus far. As at November 30, 2012, SOHO and retail units registered take-up rates of 47% (or 72 units) and 27% (or 66 units) of launched units. MARC is of the view that sales would need to improve further to enable Riverson to meet its financial obligations under the rated programme and to fund its 62%-held subsidiary Jesselton Wellness Sdn Bhd’s (Jesselton) progressive payments to acquire GKKMC. The progressive payments amounting to RM165 million are crucial to meet the balance of the construction cost of the hospital.

According to the latest unaudited accounts for the financial year ended June 30, 2012 (FY2012), Riverson recorded a loss of RM96,094 as the revenue of RM20.8 million from the sale proceeds from the commercial block was insufficient to cover the construction and other operating costs incurred. Revenue will progressively increase going forward as the sale and construction of the commercial block progresses. As at June 30, 2012, cash and cash equivalents stood at RM32.3 million, largely due to proceeds from borrowings under the rated programme.

Noteholders are, however, protected from any risks associated with the project and Riverson’s credit standing by virtue of the financial guarantee provided by Danajamin.

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