MARC has affirmed its ratings of MARC-1(fg)/AAA(fg) on Riverson Corporation Sdn Bhd’s (Riverson) RM200 million CP/MTN facility with a stable outlook. The affirmed ratings and outlook are based on the unconditional and irrevocable financial guarantee provided by Danajamin Nasional Berhad (Danajamin) which carries MARC’s financial strength rating of AAA/stable.

Riverson’s standalone credit profile has been weighed down by lower-than-expected sales of its retail units and the construction delay of its sole development project in Kota Kinabalu, Sabah. The development comprising a 10-storey commercial block (139 SOHO units, 30 office suites and 248 retail units) and a nine-storey hospital (250 beds) has a gross development value (GDV) of RM448.9 million and RM165.0 million respectively. The sales of the SOHO units and office suites have been strong but the sale of retail units, which account for 65.5% of GDV of the commercial block, has been weak, registering a take-up rate of 33.1% as at August 31, 2014. Project construction has been delayed with completion at 77.0% against the scheduled milestone of 84.1% as at September 25, 2014, largely due to tight labour conditions. The weak sales performance and construction delay could affect Riverson’s ability to meet the project deadlines to satisfy contractual obligations under the hospital agreement. Nonetheless, MARC understands that Riverson has been prioritising the construction of the hospital over the commercial block.

The sales proceeds from the commercial units and payments from the sale of the hospital were expected to largely fund the development cost of RM457.8 million, with the drawdown from the rated facility providing the initial funds for the construction. The hospital was sold for RM165 million to Riverson’s 62%-owned subsidiary, Jesselton Wellness Sdn Bhd (Jesselton), which will pay the purchase price progressively with Riverson funding 70% of the total, largely from the sales proceeds of the commercial units. Given the lower-than-anticipated cash flows from sales, Riverson may need to rely on external sources of funding to meet the remaining development costs of RM201.4 million and repay RM100 million under the rated facility by December 2015. As at end-June 2014, Riverson’s cash balance stood at RM106.4 million (FY2013: RM67.6 million).

MARC notes that the overall construction risk associated with the development is mitigated by the terms of the fixed-price construction contract awarded to WCT Construction Sdn Bhd (WCT Construction). MARC understands WCT Construction has been given an extension of construction time until December 2, 2014. In addition, Riverson is not expected to incur any liquidated ascertained damages (LAD) for the commercial block unless the commercial units are delivered to property buyers after end-2015. In respect of the hospital, GEH Management Services (M) Sdn Bhd (GEHM), a wholly-owned subsidiary of Parkway Holdings Limited, is expected to lease and operate under the “Gleneagles” brand when completed. The indicative lease terms have been proposed under the master collaboration agreement between GEHM and Jesselton; however, the final lease agreement is only expected to be signed in 1Q2015 upon Jesselton fulfilling conditions as per the agreement.

For FY2014, Riverson recorded higher revenue and pre-tax profit of RM162.4 million and RM44.8 million respectively (FY2013: RM54.2 million; RM19.3 million), mainly due to the progress billings from its commercial block and hospital component. However, cash flow from operations (CFO) was negative RM31.6 million (FY2013: positive RM28.4 million) on the back of higher development costs. MARC notes that Riverson will be able to roll over its current outstanding RM200.0 million MTNs on the redemption dates provided the outstanding amount is reduced to RM100.0 million by end-2015 in line with the reduction schedule. MARC also notes that Riverson has obtained a government grant of up to RM47.0 million, which provides some liquidity. Additionally, Sabah state government-owned entity Warisan Harta Sabah Sdn Bhd, which holds a 30%-remaining stake in Jesselton, continues to make progressive payments.

Noteholders are insulated from any downside risks associated with the project and Riverson’s credit profile by virtue of the financial guarantee provided by Danajamin. Any changes in the company’s rating will be driven by changes in Danajamin’s credit strength.

Contacts:
Joan Leong, +603-2082 2270/ joan@marc.com.my;
Nicola Tan, +603-2082 2262/ nicola@marc.com.my;
Yap Lai Ken, +603-2082 2247/ laiken@marc.com.my.