Press Releases MARC AFFIRMS ITS RATINGS ON KWANTAS SPV SDN BHD’S SUKUK IJARAH PROGRAMME AND DOWNGRADES ITS CORPORATE GUARANTEED MURABAHAH CP/MTN PROGRAMME WITH A NEGATIVE OUTLOOK

Friday, Feb 12, 2010

MARC has affirmed the ratings of Kwantas SPV Sdn Bhd’s (Kwantas SPV) RM80 million Class A, RM15 million Class B and RM60 million Class C Sukuk Ijarah at AAAID, AAAID and A+ID respectively, with a stable outlook. At the same time, MARC has downgraded the short-term and long-term ratings of Kwantas SPV’s Murabahah Commercial Papers/Medium Term Notes (CP/MTN) programme to MARC-2ID(cg)/A-ID(cg) from MARC-1ID(cg)/A+ID(cg) with a negative outlook.

The affirmed ratings on classes under the Sukuk Ijarah programme were premised on the satisfactory performance of the securitised plantation assets, in particular the net operating income generated by the assets, which is higher than MARC’s assessed sustainable income of the plantation estates. The affirmed ratings remained consistent in relation to the required loan-to-value (LTV) ratio and MARC’s performance expectations.  Following the further amortisation of RM20 million of Class C Sukuk since MARC’s last rating action in October 2008, the outstanding amount under Class C has reduced to RM20 million. Accordingly, the rating of the outstanding Class C Sukuk now reflects ‘A+’ level of LTV support and is not affected by MARC’s downgrade of Kwantas Corporation Berhad’s (KCB) corporate credit rating. The stable outlook on the ratings reflect expectations that the estates performance will remain within MARC’s assessed sustainable net operating income (NOI) of RM28 million and long-term crude palm oil (CPO) price assumption of RM1,500/MT amidst the continuing volatility of the CPO prices. Meanwhile, the downgrades on the Murabahah CP/MTN programme consider the apparent deterioration of KCB’s credit standing as the guarantor of the programme. The outlook revision reflects the uncertainties surrounding KCB’s business prospects in China, its operational challenges and weaker demand for its refined products, all of which have affected its earnings and cash flow visibility. The rating also takes cognisance KCB’s pressured near-term liquidity risk and the substantial increase in its short-term borrowings.

Wholly-owned by KCB, Kwantas SPV is a special purpose company incorporated for the sole purpose of owning and leasing the securitised plantation estates for the benefit of Sukuk investors as well as issuing up to RM65 million Murabahah CP/MTN to part-finance working capital needs of its sole shareholder.  At transaction close, Kwantas SPV acquired from the subsidiaries of KCB (sellers/ lessees) plantation estates with a total acreage of 9,049 ha and subsequently leased back the securitised assets to the seller under Ijarah Agreements with tenure of nine years. Sukukholders benefit from the irrevocable and unconditional undertaking from KCB (the originator) to ensure the obligations of the lessees are met on a timely basis. The lease payments fund Kwantas SPV’s obligations under the Sukuk. The transaction also grants the trustee the power of attorney to sell the plantation assets to third parties should the sellers or originator fail to redeem the securitised assets. Refinancing risk is mitigated as the structure incorporates an amortising structure commencing one year after issuance. As of December 2009, RM40 million of Class C Sukuk, or 25.8% of the RM155 million Sukuk notes have been redeemed, leaving RM115 million currently outstanding.

During financial year ending June 30, 2009 (FY2009), the securitised plantation estates demonstrated satisfactory financial performance given the high mature to planted area ratio and stable operating expenses. MARC had revised its assessment of sustainable NOI of the estates to RM28 million, and its discounted cash flow (DCF) value of the securitised plantation estates to RM254.5 million in October 2008 from RM24 million at transaction close. With the amortisation of Class C Sukuk Ijarah, LTV ratios for Class A, Class B and Class C Sukuk have declined to 31.4%, 37.3% and 45.2%, respectively as of June 2009 based on MARC’s unchanged DCF valuation of RM254.5 million compared to 36.7%, 43.5% and 55.0% at transaction close.

As of September 2009, the securitised plantation estates comprise total mature area of 7,529 ha, representing 92.5% of the total planted area. Of the total mature area, approximately 69.6% or 5,664 ha are planted with prime mature palms. The operating performance of the securitised plantation estates has consistently exceeded Sabah’s and Malaysia’s average fresh fruit bunches (FFB) yield over the past five years and is expected to be sustained, going forward. In FY2009, however, the estates registered a consolidated NOI of RM32.5 million in FY2009, which is 16% higher than the revised NOI in FY2008 of RM28.0 million. The entire FFB output of the securitised estates has been used as feedstock for KCB’s mills and MARC does not expect any change to current arrangements.

While its upstream plantation segment has remained relatively stable, FY2009 saw significant deterioration in the operating performance of KCB’s downstream operations. This was mainly attributable to low product prices, and reduced demand for palm oil-based products as reflected by low capacity utilisation rates for its refinery mills in Malaysia and processing mills in China. This led KCB to report an operating loss of RM68.3 million (FY2008: operating profit of RM238.6 million) in FY2009. In 1QFY2010, KCB continued to post an operating loss and negative operating margin as a result of the high fixed costs and low sales volume of its China operations. Meanwhile, continued capex for its mills in Malaysia and China in FY2009 amounting to RM27.4 million contributed to the significant decline in KCB’s cash and cash equivalent balances to RM50.0 million (FY2008: RM144.3 million), of which RM33.9 million are unrestricted cash vis-à-vis its short-term borrowings of RM646.2 million. KCB’s working capital cycle lengthened in FY2009 with inventory turnover days doubling to 50 days compared to 25 days in FY2008, due to the pile-up of stocks in the China’s operations. KCB’s remaining availability under its RM738.2 million of total banking facilities is approximately RM145.6 million as at October 15, 2009.

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