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by Ram Ratings

Almost RM15bil of sukuk deals closed in H1 despite turbulent environment.

A total of 34 new sukuk deals, with a combined issuance value of RM14.5bil, were successfully closed in 1H08. Although less than half that of the previous corresponding period, this is still respectable considering the jittery market and widening bond spreads amid the ongoing credit crisis, mounting inflationary pressures and continued concerns about flagging global economic growth.

RAM notes that sukuk issues accounted for about 34% of the domestic market’s RM43.4bil of rated corporate bond issues in the first half of this year.

Big Boys’ Club: The sukuk market is still the domain of infrastructure issues. Eight corporates from this sector entered the market with some RM8.16bil of sukuk programmes in 1H08, accounting for 56% of the total sukuk market. This was followed by the real estate and construction sector, with a 12% share.

The more notable sukuk programmes that were closed between January and June this year included those by PLUS SPV Bhd, Menara ABS Bhd and Al-‘Aqar Capital Sdn Bhd.

Source: FAST/RAM Ratings Database

The RM4bil (nominal value) sukuk programme by PLUS SPV represents the market’s largest year-to-date sukuk deal.

PLUS SPV is an independent special-purpose company through which Plus Expressways Bhd (PEB) had issued sukuk to meet its funding requirements.

PEB is an investment-holding company, and is primarily involved in the operation of tolled roads, both in Malaysia and abroad.

Its stable of domestic toll-road concessionaires includes Projek Lebuhraya Utara-Selatan Bhd, Expressway Lingkaran Tengah Sdn Bhd (Elite), Linkedua (Malaysia) Bhd and Konsortium Lebuhraya Butterworth Kulim (KLBK) Sdn Bhd.

In addition, PEB has ventured into India and Indonesia, with stakes in three toll-road concessionaires.

Meanwhile, the RM1bil sukuk ijarah by Menara ABS, a real-estate-backed transaction involving the securitisation of properties with a combined value of RM1.03bil, is Malaysia’s largest securitisation of property assets executed to date.

Menara ABS is a special-purpose vehicle, incorporated for the purpose of undertaking a sale-and-leaseback transaction involving four properties owned by Telekom Malaysia Bhd.

Despite its relatively small offering, Al-‘Aqar Capital’s RM300mil Sukuk Ijarah is noteworthy as the first domestic commercial–real-estate-backed transaction involving hospital properties.

Under this transaction, Al-‘Aqar Capital had issued medium- and short-term Sukuk Ijarah to acquire the beneficial interests in 6 hospitals from Al-‘Aqar KPJ Real Estate Investment Trust (Al-‘Aqar REIT).

The KPJ Group – the largest provider of private healthcare services in Malaysia – is also the largest shareholder of Al-‘Aqar REIT and has a vested interest in the operational and financial stability of Al-‘Aqar REIT, i.e. the lessee under the ijarah agreement (lease agreement). Al-‘Aqar Capital, a special-purpose vehicle, is wholly owned by Amanah Raya Bhd – the REIT trustee for Al-‘Aqar REIT.

Credit concentration: In 1H08, RAM published the ratings of 22 new corporate sukuk issues, with an aggregate issuance value of RM11.2bil; about 46% or RM5.1bil of this had already been issued by end-June 2008. This constituted about 70% of the entire market’s RM7.3bil of sukuk issued as at the same date.

In terms of rating distribution, the “AA” rating bracket had the highest density vis-à-vis RAM Ratings’ sukuk portfolio, skewed by the large sukuk programmes originated by infrastructure-based obligors.

PLUS SPV’s RM4bil (nominal value) sukuk programme is rated AA1 while Lingkaran Trans Kota Sdn Bhd’s (Litrak) RM1.54bil sukuk facility has been assigned a long-term rating of AA2.

In the meantime, MRCB Southern Link Bhd’s (MRCB Link) RM845mil senior and RM199mil junior sukuk programmes have been accorded respective AA3 and A2 ratings. All the long-term ratings have a stable outlook.

The rating of PLUS SPV’s sukuk is essentially a reflection of PEB’s credit risk.

Under the musyarakah structure, the sukuk holders’ recourse to PEB is recognised via a purchase undertaking deed; PEB, as the obligor, will undertake to purchase the sukuk holders’ interests in the musyarakah venture upon its dissolution – scheduled or otherwise.

With this strong credit link between PLUS SPV and PEB, we had assessed both companies in aggregate from a credit perspective.

In evaluating the creditworthiness of PEB, we had relied on our corporate rating methodology, given its make-up as an investment-holding company.

A similar approach had been adopted when assessing the sukuk issues of Gamuda Bhd, Muhibbah Engineering (M) Bhd and Tanjong Offshore Bhd, where our assessment had focused on the entity tasked with redeeming the sukuk.

The final assigned rating had depended on the ranking of the sukuk in relation to the entity’s other financial obligations.

In contrast, the creditworthiness of the sukuk programmes of Litrak and MRCB Link had been assessed using RAM’s project-finance methodology, given the nature of these entities as single-purpose companies and that the transactions were wholly driven by the particular projects.

Here, RAM had focused on the aptitude of the underlying toll-road projects to generate sufficient funds to meet the periodic returns and final capital repayment.

The ratings are supported by favourable project economics, the robust cash-generating ability of the concession asset, strong debt-protection measures and stringent covenants as well as cash-trap mechanisms for the benefit of the sukuk holders.

In the case of MRCB Link, the 2-notch rating difference between the senior sukuk and junior sukuk is attributed to the strong equity-like features of the latter, which strengthen the credit position of the senior sukuk holders.

On another note, the creditworthiness of the sukuk issued by Menara ABS and Menara Al’Aqar had been appraised based on RAM’s asset-backed/structured-finance rating methodology.

In rating this type of sukuk, which bears a resemblance to asset-backed transactions, we had focused on the robustness of the underlying assets in generating sufficient funds to meet the SPVs’ ongoing profit obligations, and in supporting the realisable sustainable values of the assets to meet principal redemption by their legal maturity dates.

Malaysian Sukuk League Table for 1H08: The RM14.5bil of sukuk issues in 1H08 had been brought to the market by 15 financial and advisory institutions.

RAM’s provisional tabulation, based on data collated from Bank Negara’s FAST information system and the websites of the rating agencies, indicates that CIMB Investment Bank Bhd topped the table with a 43%-share, followed by Aseambankers Malaysia Bhd (16%) and AmInvestment Bank Bhd (8%).

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