MARC Ratings has downgraded its ratings on Tropicana Corporation Berhad’s RM1.5 billion Islamic Medium-Term Notes (IMTN) Programme (Sukuk Wakalah) and RM2.0 billion Perpetual Sukuk programme to A_IS and A-_IS from A+_IS and A_IS. The outstanding under the Sukuk Wakalah and Perpetual Sukuk programme currently stands at RM1.5 billion and RM648.0 million. The ratings outlook remains negative. 

The rating action reflects Tropicana’s continued weak financial performance and slower-than-expected asset disposals that would have eased its tightening liquidity position vis-à-vis its near-term financial obligations. The negative outlook highlights the lingering uncertainties on the timely conclusion of asset sales and/or refinancing initiatives to strengthen balance sheet, and concerns on group financial performance achieving a meaningful turnaround given the still challenging outlook for the domestic property industry. 

Tropicana’s financial performance has been hampered by weak property sentiments, compounded by high construction material prices and high interest costs. For 2022, adjusted pre-tax loss widened to RM102.3 million from negative RM74.2 million in the prior year, even on excluding a one-off RM298.6 million loss provision from land parcel disposals. Its debt and interest coverage remain weak; any meaningful improvement in these metrics would be through a substantial reduction in borrowings.

Borrowings have remained elevated at RM4.43 billion (including Perpetual Sukuk), of which term borrowings of RM428 million and rated IMTNs of RM645 million will mature by end-2023. Asset disposals which are now expected to be completed by end-2023 would provide cash proceeds of around RM648 million. Coupled with the conversion of a shareholder’s advance of RM180 million to equity, gross leverage would decline to around 0.7x by year end from 0.87x as at end-2022. Unencumbered cash balances stood at about RM479 million with undrawn credit facility of about RM344 million as at end-2022 providing some financial flexibility.

Tropicana’s established track record in the domestic property industry and earnings visibility from its unbilled sales of around RM2.0 billion moderate our rating concerns. As at end-2022, ongoing developments carry a combined gross development value (GDV) of RM4.8 billion, mainly in the Klang Valley, with the overall average take-up rate standing at around 60%. The group has planned launches worth around RM3.0 billion GDV over the near term. We also note the completed inventory level declined to RM195 million as at end-2022 (end-2021: RM275 million) through concerted sales initiatives. 

MARC Ratings will continue to monitor Tropicana’s progress. The outlook will be revised to stable upon conclusion of the ongoing deleveraging efforts and the group achieving sustainable improvement in financial performance. Conversely, the ratings could be lowered if its financial position continues to weaken, in particular its liquidity position to address its upcoming financial commitments. The one-notch rating differential between the Sukuk Wakalah and Perpetual Sukuk reflects the latter’s features in line with our methodology on subordinated instruments. No equity credit is given to the Perpetual Sukuk issuance as it ranks pari passu with the senior obligations.

The negative outlook highlights the lingering uncertainties on the timely conclusion of asset sales and/or refinancing initiatives to strengthen balance sheet, and concerns on group financial performance achieving a meaningful turnaround given the still challenging outlook for the domestic property industry. 

We do not envisage any upside to the rating over the near term given the challenges. 

The ratings could be lowered if its financial position continues to weaken, in particular its liquidity position to address its upcoming financial commitments.