MARC has lowered its ratings on Ample Zone Berhad’s (Ample Zone) RM10.9 million Class B Sukuk Ijarah (Sukuk) to A-IS from AA+IS, and affirmed RM75 million Class C at B+IS. The outlook on the ratings remains negative. The rating downgrade on the Class B Sukuk reflects severe stress on the property-backed transaction caused by continued non-payment of rentals from entities related to Talam Corporation Berhad (Talam) for space occupied within the securitised properties. This has caused the balance in the Sukuk Profit Reserve Account (SPRA) to fall below its minimum required level since January 2010. MARC had earlier cautioned about the high likelihood of this occurring in its August 2009 review. As of August 2010, the total amount in arrears from the non-performing tenants is close to RM14 million. Talam group is the seller-lessee of the remaining three ijarah assets under the Sukuk comprising Menara Maxisegar, Midpoint Shopping Complex and Pandan Kapital Shopping Complex. MARC has also affirmed its B+IS rating on Ample Zone’s Class C Sukuk, taking into account Talam’s weak payment history since the beginning of the transaction and the Sukuk’s high reliance on the performance of the collateral properties and disposal for full and timely payment of periodic profit and final redemption of the non-amortising Sukuk.

At transaction close in January 2005, Ample Zone issued RM50 million of Class A, RM25 million of Class B and RM75 million Class C Sukuk. Ample Zone had earlier disposed one of the securitised properties in January 2008. Proceeds from the disposal were utilised to fully redeem the Class A Sukuk and RM9.5 million of the Class B Sukuk, leaving RM10.9 million Class B Sukuk and RM75.0 million Class C Sukuk outstanding. MARC believes that Ample Zone has sufficient liquidity to fund its finance obligations in the next six months, supported by further draws on the SPRA. As of end-August 2010, the balance in the designated accounts stood at RM4.0 million, which includes RM2.7 million in the SPRA, a shortfall of over RM4.5 million below the minimum required amount. After meeting its January 2011 debt service payments, the SPRA balance is projected to decline to RM1.4 million.  MARC understands that Ample Zone has initiated the disposal of the remaining properties since the first quarter of 2010 but has not been successful in concluding a sale of any of the three properties. Sukukholders have granted indulgence with respect to the restoration of the SPRA premised on the assignment of expected sale proceeds of a land belonging to Talam group estimated to be around RM3.6 million, excluding the down payment made to Talam group. In addition, the group is also expecting potential recovery of rental in arrears from one of its tenants by end-2010. MARC believes that Ample Zone faces significant execution risk with regards to the disposal of the three remaining properties constituting the ijarah assets. The collateral coverage provided by the remaining securitised properties based on its forced-sale value is about 1.6 times of the remaining principal outstanding for both classes of the Sukuk. Force-sale of the properties at its 2006 valuation should also ensure full recovery of the rental payment in arrears and some overdue quit rent and assessment charges.

The negative outlook on the ratings reflects continuing pressure on the transaction which is unlikely to abate in the near-term without a disposal of one or more of the underlying properties. It also considers the inherent execution risk associated with the disposal of the properties, taking into account Ample Zone’s failure to locate buyer(s) to date.

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