MARC Ratings has assigned a preliminary rating of A_IS to Tropicana Corporation Berhad’s proposed RM1.5 billion Islamic Medium-Term Notes (IMTN) (Sukuk Wakalah) and concurrently affirmed its ratings of A_IS on the RM1.5 billion IMTN (Sukuk Wakalah) and A-_IS on the RM2.0 billion Perpetual Sukuk. The outlook on all ratings is stable. 

Proceeds from the initial drawdown of RM350 million under the new programme will be largely utilised to redeem the first tranche of its Perpetual Sukuk of RM248 million on the first call date on September 25, 2024. Further issuances under the new programme over the next three years would be to redeem the remaining two Perpetual Sukuk tranches and refinance the outstanding notes under the existing Sukuk Wakalah, which currently has an outstanding of RM745.5 million (end-2023: RM855.5 million).

The ratings on the Sukuk Wakalah primarily reflect Tropicana’s lengthy track record in property development, ability to generate sizeable sales revenue from developments and improving balance sheet structure. The one-notch differential between the Perpetual Sukuk and Sukuk Wakalah is in line with MARC Ratings’ methodology on subordinated instruments; no equity credit was given to the Perpetual Sukuk issuance as it ranks pari passu with other senior obligations.

Tropicana’s ongoing developments had a total gross development value of RM5.5 billion with an average take-up rate of 71% as at end-May 2024. Unbilled sales of RM2.4 billion underline strong earnings visibility over the medium term. For 1Q2024, revenue and operating profit rose by 13.5% y-o-y to RM291.3 million and 38.7% y-o-y to RM56.4 million. 

MARC Ratings notes that in line with the deleveraging plans, Tropicana generated proceeds of RM673.9 million primarily from the disposal of two hotels and land parcels year to date. Consolidated debt-to-equity (DE) ratio improved to around 0.65x as of end-July 2024 (end-2023: 0.74x). Proceeds from other disposals including Tropicana Gardens Mall and land parcels in Johor for a total of RM1.2 billion would further reduce borrowings (including Perpetual Sukuk) to RM2.3 billion by end-2024 from around RM3.3 billion as at end-July 2024, with the DE ratio expected to ease further to around 0.50x. With lower borrowings, there has been significant reduction in financing cost with OPBITDA interest cover forecast to improve to 2x by end-2024 (end-2023: 0.9x). 

Over the near term, Tropicana would focus on its ongoing projects primarily in the Klang Valley, Genting Highlands and Langkawi; it is expected to undertake more developments in Johor Bahru which would require increased working capital. While the group has headroom to undertake borrowings, the rating agency expects the group to demonstrate prudence in its funding approach. Among factors that the rating agency would consider for any rating upside would be a sustained improvement in OPBITDA interest cover.

The stable outlook assumes that Tropicana’s business and financial performance will continue to improve, and conclusion of asset sales and/or refinancing initiatives to strengthen balance sheet will be timely to meet its upcoming financial obligations.

Upsides to the rating/outlook would consider significant and sustained improvement in its financial position and business profile. The ratings could be lowered if Tropicana’s financial position were to weaken, particularly its liquidity position in addressing its upcoming financial commitments.