MARC has affirmed the ratings of MARC-1(bg)/AAA(bg) and MARC-1(bg)/ AA+(bg) for Legolas Capital Sdn Bhd’s (Legolas) RM105.0 million Commercial Paper / Medium-Term Notes (CP/MTN) Programme and RM110.0 million CP/MTN, respectively. The ratings are underpinned by the irrevocable guarantees provided by Malayan Banking Berhad (Maybank) and United Overseas Bank (Malaysia) Bhd (UOBM), respectively. The ratings carry a stable outlook. Legolas, a special purpose vehicle, is 85.1% owned by Ireka Sdn Bhd (ISB), which in turn, is wholly owned by public listed Ireka Corporation Bhd (ICB) and 14.9% held by MCDF Investment Pte Ltd, a related company of Singapore’s CapitaLand Limited (CapitaLand). Legolas was incorporated for the sole purpose of jointly undertaking the development and construction of a mixed development project in Mont’ Kiara, Kuala Lumpur known as “ONE Mont’ Kiara”.

The affirmed ratings of MARC-1(bg)/AAA(bg) and MARC-1(bg)/AA+(bg) for the facilities reflect the financial institution ratings of Maybank and UOBM respectively who have provided unconditional and irrevocable guarantees in respect of the facilities. The affirmed ratings are based on analyses of published financial information, as well as additional information in the public domain. Maybank’s financial institution ratings reflect the bank’s dominance in the domestic market and its strong franchise value, sound financial profile, improved asset quality and robust capitalization. UOBM’s credit strength is underpinned by its good recurring profitability, generally positive asset quality trends, sound capitalisation as well as the significant franchise value derived as a core subsidiary of United Overseas Bank Limited Group and implicit support from its parent.

ICB is currently in the midst of a restructuring exercise initiated in May 2007 which will entail the sale of most of ICB’s property development assets (including Legolas and the ONE Mont’ Kiara project) to Aseana Properties Limited (APL), an investment holding company listed on the Main Market of the London Stock Exchange. ICB holds a 19.57% stake in APL and is the main contractor and development manager of the ONE Mont’ Kiara project through its wholly owned subsidiaries. The disposal of Legolas to APL is expected to be completed by 2Q2008, following which MARC will reassess the standalone credit profile of Legolas while incorporating APL’s credit credit quality and its commitment to Legolas.

The ONE Mont’ Kiara project comprises the development of a four storey retail complex, a 17 storey office tower, a 31 storey office suite and a four storey basement car park with a total gross development value of approximately RM494.6 million (USD157 million @ RM3.15/USD). CapitaLand, one of the largest listed real estate companies in Asia, is the project manager of ONE Mont’ Kiara. The office suites were first launched in December 2006 and as at March 2008 achieved a 74% take up rate on launched units. The retail complex and office tower will be held as investment properties. As at January 2008, the project was 18% completed.

ICB is principally involved in construction, property management, property development, trading and e-commerce through its subsidiaries. In FY2007, the group completed the disposal of its hotel operations. The disposal of its property development assets will be reflected in FY2008. Following the group’s restructuring exercise, ICB’s core operations will be focused solely on construction and property management.

ICB incurred losses in FY2007 due to margin erosion on account of rising building material prices. For the first three quarters of FY2008 ended December 31, 2007, approximately 90% of ICB group’s revenue was derived from its construction division. Rising raw material prices and a depleting order book resulted in the construction segment’s reported losses of RM18.8 million. As at January 2008, the group’s outstanding order book stood at RM326.3 million of which 98.6% comprised property development works for APL. This exposes the group to client concentration risk and associated credit risk, as well as reliance on few projects in Mont’ Kiara. 

Going forward, its property management division is projected to generate annual management fees amounting to 2% of APL’s net asset value per annum. The group raised cash proceeds of about RM262.4 million with the disposals of its hotel and property development operations. Part of these proceeds were used to refinance ICB’s borrowings. Since FY2006 until December 31, 2007, ICB successfully pared down its borrowings by approximately RM469.0 million to RM94.0 million. The disposal proceeds helped the group turn in a profit of RM166.1 million for the nine months of FY2008, ended December 31, 2007. Apart from offsetting further pre-tax losses of RM41.7 million, the disposals have bolstered ICB’s net cash flow from operations to RM92.8 million for the nine months.