Published on 19 Dec 2019.
RAM Ratings has assigned a preliminary AA3/Stable rating to the RM68 mil first issuance (Tranche 1 IMTN) under Exsim Ventures Berhad’s (Exsim Ventures or Issuer) proposed RM2 bil Sukuk Musharakah Programme (IMTN Programme). This is Exsim Development Sdn Bhd’s (Exsim or the Group) second sponsored programme to monetise its progress billings – the first was established early this year via Exsim Capital Resources Berhad to monetise projects under the ambit of the Housing Development (Control and Licensing) Act 1966 (HDA). Notably, Exsim Ventures’ IMTN Programme is the first in Malaysia to monetise future billings from commercial development projects not governed by the HDA.
Concurrently, the Issuer will undertake an unrated RM35 mil Sukuk Murabahah ICP facility (Tranche 1 ICP) to be issued under a RM1 bil Sukuk Murabahah ICP Programme as a contingent line to meet any shortfalls in Tranche 1 IMTN obligations, as well as construction cost overruns and timing mismatches between the underlying project’s development costs and expected progress payments. The ICP for the Tranche 1 IMTN will be guaranteed by Danajamin Nasional Berhad (rated AAA/Stable/P1) and underwritten by United Overseas Bank (Malaysia) Bhd (rated AAA/Stable/P1).
The Tranche 1 IMTN will be backed by executed sale and purchase agreements (SPAs) for Scarletz Suites (the Project), located on Lorong Yap Kwan Seng in Kuala Lumpur. Scarletz is a commercial development comprising 604 units of office suites, with a multi-storey car park and communal facilities. As it is a commercial development, RAM’s assessment also considers additional provisions not seen in previous RAM-rated progress billings transactions. These measures are aimed at providing enhanced governance of designated accounts and ensuring the developer’s interest is better aligned to facilitate project completion, in view of the lack of regulatory oversight. For commercial property, any recourse and remedy for buyers will fall back on the contracted terms of the SPA with the developer. Further, our risk metrics have expanded to include risk parameters that are unique to commercial properties, taking into consideration the performance of the commercial property and loan market.
With Scarletz fully sold as at end-September 2019, the Project is estimated to generate a cashflow of RM314.4 mil up to the transaction’s legal maturity date in June 2023. Under RAM’s stressed cashflow scenario, the estimated remaining gross development profit of RM116.3 mil to be generated within the transaction’s tenure provides adequate credit enhancement to withstand the risks of buyer defaults and potential depreciation in asset value, commensurate with the assigned rating. In addition, 84.8% of the units are end-financed by financial institutions, with a weighted average loan-to-value of 80.7%. The abovesaid factors substantially reduce the risk of buyers defaulting on progress payments.
Given the sensitivity of the Project’s working capital cycle, we stress tested the transaction’s liquidity (including early partial amortisation) and found the RM35 mil ICP facility to be adequate to mitigate any shortfall and/or timing mismatches by the legal maturity date. RAM notes that the payment milestones for Scarletz are more front-loaded relative to development projects under the HDA, thus reducing working capital requirements. As an extra measure to ensure project completion, the Tranche 1 IMTN will also benefit from a RM5.5 mil bank guarantee which can be called upon the occurrence of certain events, even after the ICP facilities have been exhausted.
Assuming drawdown in December 2019, the developer’s targeted vacant possession (VP) date in March 2022 is about four months from the Project’s legal VP date in July 2022 and nine months from the expected maturity date of the Tranche 1 IMTN. The developer’s targeted physical completion date in August 2021 affords a considerable time buffer of 11 months from the legal VP date as it takes into account the period required to partially furnish the units, although legally not a prerequisite under the SPA by the VP delivery date.
Separately, we believe that the Group will need to manage its balance sheet and liquidity well in coming years, especially after its acquisition of a 65-acre tract of land in Empire City Damansara (ECD) in June 2019. While this secures the Group a sustainable pipeline of projects to be executed over the longer term, the primarily debt-funded acquisition immediately elevated its gearing to a high of 3.50 times as at end-June 2019 from the historical 1.50 times. That said, some comfort is derived from Exsim’s intention to pare down borrowings over the next three years, its strong unbilled sales of RM1.9 bil as at end-June 2019 that is expected to grow to RM2.5 bil by 2020, as well as the Group’s reputation and track record of past projects. The management expects its gearing ratio to ease to approximately 3.07 times by end-December 2019 and 2.27 times by end-December 2020. Its ability to deleverage, however, will highly depend on the take-up rate of future projects, which in turn, will partly hinge on the completion of ECD 1 to restore confidence in the entire development. We will closely monitor progress in this regard and assess the impact on the Group’s performance in delivering projects securitised under the respective sukuk programmes (namely D’Nuri, Nidoz and Scarletz), if any.
RAM will assign the final rating after a satisfactory review of finalised transaction documents and relevant legal and tax opinions, together with a review and validation of the Project’s latest construction progress. For surveillance, we will rely on periodic reports prepared by the project manager, the independent project certifier and architects to some extent. Considering the relatively short tenure of the transaction, we expect to report to investors semi-annually or as warranted by transaction developments.
Lim Chern Yit
(603) 3385 2528
(603) 3385 2577
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Ratings on Exsim Ventures Berhad