MARC has affirmed its AA+IS rating on Ample Zone Berhad’s (AZB) Sukuk Al-Ijarah (Sukuk) RM12.1 million Class B and lowered its rating on the RM75.0 million Class C Sukuk to B+IS from BB-IS. Additionally, MARC has assigned negative outlooks to both classes of Sukuk to reflect the downward pressure on the ratings arising from the continuing failure of entities related to AZB to pay rent for space occupied in one of three remaining collateral properties backing the Sukuk. The shortfall in the rental stream will necessitate draws on the Sukuk Profit Reserve Account (SPRA) from January 2010 onwards, which could result in the balance falling below its minimum required level of twelve months’ equivalent Ijarah profit payments for both classes by July 2010. The foregoing highlights increasing urgency in restoring sustainable cash flow either by way of resolving the outstanding related party lease receivables or disposing of one or more of the three remaining collateral properties to pay down principal on the Sukuk. The credit-linked Class C Sukuk rating downgrade follows MARC’s recent review of Talam Corporation Berhad’s (Talam) corporate credit rating, which has been assigned a B+ rating, after the completion of its debt restructuring, and incorporates its strained financial position and its continuing failure to meet its obligations under the Ijarah Rental Agreement.   

AZB was incorporated solely to undertake the Ijarah sale-and-leaseback transaction involving the acquisition of four buildings - Menara Maxisegar, Wisma Talam, Midpoint Shopping Complex and Pandan Kapital Shopping Complex (collectively referred to as securitised assets) - from three subsidiaries of Talam and a private company. The buildings were leased back to the sellers (also the lessees) in return for periodic rental payments. The sellers have also provided a unilateral, unconditional and irrevocable option/undertaking to AZB to purchase the buildings. In January 2008, Wisma Talam was disposed off for RM63.5 million, the net proceeds of which were utilized to fully redeem Class A Sukuk and partially redeem RM9.5 million of Class B Sukuk.

Since MARC’s last rating action on April 28, 2008, Class B Sukuk’s loan-to-value (LTV) ratio has improved to 17.3% following a scheduled redemption of RM1.2 million in January 2009, and the balance in the SPRA continues to be in compliance with its minimum required level. During the period under review (Feb 2008 to Jan 2009), the total net cash flow (NCF) generated by the remaining securitised assets stood at RM6.3 million, 19.2% lower as compared to MARC’s assumed stabilized NCF of RM7.8 million due to higher operating cost arising from an upward revision of electricity tariff, one-off payment of outstanding assessment fees (two years) and continued shortfall in rental income from Menara Maxisegar. The total net outstanding amount from three subsidiaries of Talam which are occupying space in Menara Maxisegar stood at RM13.7 million as of May 31, 2009, of which RM12.3 million has been outstanding for more than four months. Stripping the one-off expense, the NCF under the review period reported a 12.8% decline from the stabilized NCF. The occupancy rates and average rental rate of the securitised assets remained stable.

Based on the NCF achieved in financial year ending January 2009 (FY2009) and continued non-rental payment by Talam, MARC expects a shortfall in Class C profit payment to occur from January 2010 onwards, resulting in the utilisation of funds in the SPRA. Continued draws on the SPRA could result in the balance falling below its minimum required level by July 2010, following which MARC believes AZB will face a serious challenge to restore the SPRA within the prescribed two-month cure period. The final redemption of Class B and Class C Sukuk is also contingent on the sale of the remaining securitised assets. MARC is of the view that the collateral coverage provided by the remaining securitised assets’ forced sale value of RM139.2 million (based on a 2006 valuation) should ensure a very high probability of ultimate recovery. Class B Sukuk’s final principal redemption of RM9.7 million in 2012 represents only 7.0% of the total forced sale value of the remaining securitised assets.

Contacts:
Nadia Edmaz Abdul Hadi, 03-2090 2262/ nadia@marc.com.my;
Sandeep Bhattacharya, 03-2090 2247/ sandeep@marc.com.my