MARC has affirmed its AAAID rating on Kwantas SPV Sdn Bhd’s (Kwantas SPV) outstanding RM80 million Class A Sukuk with a stable outlook. Concurrently, MARC has withdrawn its AAAID and A+ID ratings on Kwantas SPV’s RM15 million Class B and RM60 million Class C Sukuk respectively, which have been fully redeemed. MARC has also affirmed its ratings on Kwantas SPV’s RM65 million Murabahah Commercial Papers/Medium Term Notes (CP/MTN) at MARC-2ID(cg)/A-ID(cg). The rating outlook on the CP/MTN remains negative. Wholly-owned by Kwantas Corporation Berhad (KCB), Kwantas SPV is a special purpose company incorporated to issue the Sukuk Ijarah and CP/MTN programmes. At transaction close, Kwantas SPV acquired and leased back securitised plantation estates to KCB related entities for the benefit of sukukholders and executed Murabahah sale and purchase agreements for the benefit of the noteholders. The lessees’ obligations under the leases and Kwantas SPV’s obligations under the Murabahah CP/MTN are guaranteed by KCB.

The affirmed rating of the Class A Sukuk is premised on the satisfactory net operating income (NOI) generated by the securitised plantation estates, which remained higher than MARC’s assessed sustainable income of the said assets. The loan-to-value (LTV) ratio for the Class A Sukuk remains at 31.4%, reflecting strong collateral backing for the sukukholders. The stable outlook incorporates MARC’s expectations that the actual performance of the estates will remain within MARC’s assessed sustainable NOI. Meanwhile, the ratings on the Murabahah CP/MTN mirror the short- and long-term corporate credit ratings of KCB as the guarantor of the notes. The affirmed ratings and negative outlook reflect continued pressure on KCB’s consolidated credit profile due to its unprofitable downstream operations in China. KCB has reduced production at several of its processing plants in China to curtail losses. MARC remains concerned about the relatively weak near-term prospects for KCB’s refinery and oil processing businesses and the group’s continued dependence on short-term borrowings to fund capital expenditure.
 
As of June 2010, the securitised plantation estates comprise a total mature area of 8,101 hectares (ha), representing 98.2% of the total planted area. Planted trees are all below the age of 20 years with over 70% of the total mature area now falling within the past-prime age bracket, leaving only about 10% within the prime age group. However, the average fresh fruit bunches (FFB) yield of the securitised estates fell to 23.7 metric tonnes per hectare (MT/ha) in 12 months ended June 30, 2010 (FY2010) from 26.3 MT/ha and 26.1 MT/ha in FY2009 and FY2008 respectively due to shortages of harvesters and substantial cuts in fertiliser application across the securitised estates consequent to KCB’s overall tight cash flow position. The downside risks associated with the unbalanced maturity profile of the securitised plantations and recent cuts in fertiliser application are somewhat mitigated by actual NOI levels which are still within MARC’s assessed sustainable NOI and the continuing deleveraging of the transaction. The estates’ consolidated NOI of RM49.9 million in FY2010 was 78% higher than MARC’s assessed sustainable NOI of RM28.0 million. The LTV ratio of the Class A Sukuk, which is based on the plantation estates’ discounted cash flow value of RM254.5 million, remains at 31.4% and the serial redemption of the Class A Sukuk commencing in May 2011 will further reduce the actual LTV and increase collateral backing over time. With the full redemption of the Class B and Class C Sukuk, Murabahah CP/MTN noteholders now have a priority charge over the securitised plantation assets immediately after Class A sukukholders.

KCB announced a turnaround pre-tax profit of RM5.2 million for FY2010 following FY2009’s pre-tax loss of RM95.3 million. However, MARC notes that revenue had fallen by 20% and KCB’s improved financial performance had been achieved through curtailing production at its processing plants in China. Plant capacity utilisation has fallen to 27% for its refinery mill in Malaysia and below 10% for three of its plants in China. At the same time, the group’s reduced net working capital and modest profit have helped lift its operating cash flow to RM221.5 million which was used to fund its RM183.8 million of capital investments in FY2010. MARC believes that KCB’s high reliance on short-term borrowings increases KCB’s exposure to rollover and refinancing risk. The group had cash and bank balances of RM60.9 million (FY2009: RM50.0 million) as of September 30, 2010 against short-term borrowings of RM637.3 million. More than 90% of the borrowings mainly comprise revolving credit facilities. At the same time, the group has RM266 million remaining availability under its committed credit facilities. MARC views KCB’s ability to generate sufficient operating cash flows to meet its debt obligations and capital commitments as highly dependent on sustained CPO prices and reduced capital spending.

Contacts:
Nadia Edmaz Abdul Hadi, +603-2082 2262/ nadia@marc.com.my;
Sandeep Bhattacharya, +603-2082 2247/ sandeep@marc.com.my.