MARC has assigned the ratings of MARC-1(fg)/AAA(fg) to Riverson Corporation Sdn Bhd’s (Riverson) RM200 million 5-year Commercial Papers/Medium Term Notes (CP/MTN) Programme with a stable outlook. The ratings and outlook are based on the financial guarantee insurance policy extended by Danajamin Nasional Berhad (Danajamin) for the rated programme. Danajamin is currently rated AAA/stable premised on its important role as the sole domestic financial guarantee insurer, its status as a government-sponsored entity, its solid capital base and ample liquidity.

The proceeds from issuance under the CP/MTN Programme will be utilised to finance Sabah-based Riverson’s maiden property development on a contiguous 5.4-acre site in Kota Kinabalu. Consisting of a 10-storey commercial building and a 9-storey 200-bed hospital with a gross development value (GDV) of RM412.5 million and RM165 million respectively, construction of both components will be undertaken concurrently, with piling works having commenced in November 2011. Apart from Riverson’s high single project dependency risk, the company also lacks an operating track record and financial history. Project execution risk is moderated somewhat by the experience of the shareholders-cum-directors of Riverson in property development and the involvement of GEH Management Services (M) Sdn Bhd (GEHM), a wholly-owned subsidiary of Parkway Holdings Limited, in the development of the hospital project. GEHM has entered into a collaboration agreement with the project sponsors to provide technical input during the construction stage and is expected to enter into a lease agreement with Jesselton Wellness Sdn Bhd (Jesselton), a 62%-owned subsidiary of Riverson that will own the hospital. Nonetheless, the collaboration agreement allows for termination should either party fail to comply with their obligations. Should GEHM withdraw from the arrangement, the company may be challenged to find another suitable hospital operator.

At this juncture, contractual arrangements with respect to the project’s construction have yet to be finalised, resulting in limited clarity on the mitigation of construction risks. Riverson’s earnings visibility, meanwhile, is constrained by the scheduled launch of the project’s commercial building with only the retail component launched in the third quarter of 2011. Any delays in construction or sales launch of its commercial units, namely its office suites and SOHO units, or changes in projected pricing could impact the company’s capacity to meet its obligations under the rated programme.

Jesselton has entered into a sale and purchase agreement to purchase the hospital for RM165 million under which it is required to make progressive instalment payments during the hospital’s construction. Given Jesselton’s status as a start-up entity without a financial history, MARC believes that the company’s capacity to meet its payment obligations for the purchase of the hospital will hinge on its ability to procure sufficient amounts of debt and/or equity financing. Consequently, this creates very significant credit linkages between Jesselton and Riverson given the latter’s majority equity stake in the former. Riverson is also indirectly exposed to the risk of unexpected termination of the collaboration agreement between Jesselton and GEHM, and the risk of Jesselton not being able to raise financing for the purchase of the hospital.

MARC notes that Riverson’s projected cash flow is susceptible to minor variations in selling price of its retail lots and SOHO units. Given the company’s plan to launch a fairly large number of units (247 retail lots, 60 office suites and 152 SOHO units), MARC believes that Riverson’s capacity to meet its obligations under the programme is highly dependent on the achievement of the projected take-up rates and pricing as well as project timeliness. Noteholders are nonetheless insulated from any downside risks in relation to the project and Riverson’s credit profile by virtue of the guarantee provided by Danajamin.

Contacts:
Nisha Fernandez, +603-2082 2269/ nisha@marc.com.my;
Rajan Paramesran, +603-2082 2233/ rajan@marc.com.my.