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MARC affirms ratings on Tradewinds Capital's Sukuk Ijarah.

MARC has affirmed its AIS and +IS ratings on Tradewinds Plantation Capital Sdn Bhd's (Tradewinds Capital) asset-backed MYR 180 million Class A and MYR 30 million Class B Sukuk Ijarah (collectively known as Sukuk) respectively; the outlook on the ratings is stable.

Special purpose vehicle Tradewinds Capital is a wholly-owned subsidiary of Tradewinds Plantation Berhad (Tradewinds) incorporated to issue the Sukuk Ijarah through a sale and leaseback agreement for a collateral portfolio comprising 12 oil palm estates and three palm oil mills. The ratings reflect the above-average performance of the securitised estates and comfortable loan-to-value (LTV) ratios relative to the respective rating bands. The stable outlook is premised on MARC's expectations that the collateral portfolio would continue to exhibit results consistent with the ratings of the Sukuk.

At the same time, MARC maintains its MARC-1ID(bg)/AID(bg) ratings on Tradewinds Capital's MYR 100 million Bank Guaranteed Murabahah Commercial Paper/Medium Term Notes (BG Murabahah CP/MTN) Programme with a stable outlook. The ratings and outlook are equalised with bank guarantor OCBC Bank (Malaysia) Berhad's (OCBCM) ratings and outlook which essentially reflect the credit strength of parent Oversea-Chinese Banking Corporation Limited (OCBC). MARC recently affirmed OCBC's credit rating of A with a stable outlook. MARC regards OCBC as possessing a very strong economic incentive to maintain its Malaysian banking subsidiary's financial soundness and competitiveness.

MARC has also affirmed its MARC-1ID rating on Tradewinds Capital's RM90 million Murabahah Commercial Papers (Murabahah CP) with a stable outlook. The rating and outlook on the non-guaranteed Murabahah CPs mirror the short-term rating and outlook of Tradewinds as its operations would be the key source of repayment for the Murabahah CP. Tradewinds' short-term rating reflects the group's satisfactory liquidity and operating profitability, as well as borrowing availability under banking lines, moderated by its exposure to rubber price volatility post-acquisition of Mardec Berhad (Mardec). At the same time, MARC notes that cash flow generation has weakened during the first nine months of 2012 (9M2012), mainly as a result of higher working capital requirements at Mardec and Tradewinds' lower pre-tax profitability, as well as ongoing capital expenditure. The rating and the outlook on the Murabahah CP could come under pressure in the event the group continues to incur negative free cash flow.

In the seven-month period ended July 31, 2012 (7M2012), the securitised estates posted fresh fruit bunch (FFB) yields of 10.4 MT/ha compared to 12.7 MT/ha in the previous corresponding period due to biological stress on the oil palm trees and poor weather conditions. As a result of the decline in yield as well as the lower crude palm oil (CPO) prices during the year, Tradewinds Capital recorded lower NOI of MYR 59.4 million (7M2011: MYR 105.7 million). However, coupled with the additional NOI of MYR 14.8 million from the securitised palm oil mills (7MFY2011: RM16.4 million), Tradewinds Capital's NOI remain above MARC's assumed NOI used in determining the LTV ratios of the collateral portfolio. Using MARC's assumed NOI of MYR 42.0 million and capitalisation rate of 11 per cent, the securitised assets are valued at MYR 450.4 million, resulting in LTV ratios for the Class A and Class B Sukuk of 20 per cent and 26.6 per cent respectively. The LTV ratios have declined since Tradewinds Capital met its last redemption of Class A Sukuk of MYR 30.0 million on December 18, 2012. The principal repayments on the Sukuk have the effect of lowering the LTV ratios, hence improving collateral backing for Sukukholders over time.

During the 9M2012 period, Tradewinds' revenue grew substantially to MYR 2.20 billion (9M2011: MYR 899.27 million) after taking Mardec's results into consideration. However, after excluding Mardec's revenue of MYR 1.48 billion, Tradewinds' revenue was lower at MYR 718.4 million due to lower output and weaker CPO prices during the period. CPO prices averaged MYR 3,095/MT in 9M2012 compared with MYR 3,280/MT in the previous year's corresponding period. The weaker prices, in addition to Mardec's thinner margins, also resulted in the group's operating profit margin declining to 10.5 per cent (9M2011: 40.9 per cent). Consequently, pre-tax profit declined to MYR 201.2 million (9M2011: MYR 358.0 million) in spite of a one-time gain of MYR 25 million from the sale of an associate.

Tradewind's cash inflow from operations (CFO) decreased to MYR 67.2 million (9M2011: MYR 363.9 million) following a MYR 142.8 million increase in working capital requirements. Free cash flow was negative at MYR 150.6 million due to capital expenditure for the group's planting and replanting activities and construction of the Kuala Suai Palm Oil Mill. Further capital outlays of MYR 114.9 million were incurred following the completion of acquisition of Retus Plantation Sdn Bhd (RPSB) from a related party on September 28, 2012. However, the acquisition will be accretive to Tradewinds' cash flow and earnings in the fourth quarter of 2012. The company's liquidity profile in the coming quarters will be a key driver of Tradewinds Capital's Murabahah CP rating and outlook.

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Publication:CPI Financial
Date:Jan 2, 2013
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