Published on 28 Apr 2021.
RAM Ratings has assigned a preliminary rating of AA3/Stable to the proposed RM323 mil second issuance (Tranche 2 IMTN) under Exsim Capital Resources Berhad’s (Exsim Capital or Issuer) RM2 bil Sukuk Musharakah Programme (IMTN Programme). The IMTN Programme allows for the monetisation of progress billings by Exsim Development Sdn Bhd or its subsidiaries (Exsim or the Group), where the Group will from time to time sell to the Issuer its beneficial interest under respective sale and purchase agreements (SPAs) signed with buyers related to specific property development projects. Future receipts under such agreements will be used to fund remaining construction costs of the identified projects, as well as to meet the Issuer’s fees, expenses and obligations in respect of each sukuk issuance. Exsim Capital is a subsidiary and special-purpose vehicle of Exsim.
The Tranche 2 IMTN will be backed by future SPA receipts from two development projects – D’Quince Residences and D’Vervain Residences (collectively the Projects) – in Damansara Perdana. Both are residential projects, with 48.2% the Projects’ total units falling under the affordable housing scheme promoted by Lembaga Perumahan dan Hartanah Selangor. While the Issuer has revised the programme terms to allow for multiple tranches to be issued for the identified project(s) based on targeted sales for a more optimum issuance timing and amount, Exsim Capital has opted not to exercise this option and will only issue when the Projects achieve a take-up rate of at least 95%.
Concurrently, the Issuer will also establish an unrated RM80 mil Sukuk Murabahah ICP (Tranche 2 ICP) facility under its RM1 bil Sukuk Murabahah ICP Programme. The unrated Tranche 2 ICP will act as a contingent line to cover shortfalls in profit payments and senior expenses in respect of the Tranche 2 IMTN, construction cost overruns and/or timing mismatches between the Projects’ development costs and expected progress payments. The Tranche 2 IMTN will be underwritten by a financial institution rated AAA/P1 to be identified prior to issuance and may not be guaranteed.
In assigning the preliminary issue rating of AA3, we have considered the 95% projects take-up rate condition, an adjusted default frequency of 7.4%, an adjusted market value decline of 41.8% and the transaction structure’s ‘step-in’ mechanics. The mechanics allow sukukholders to appoint a new contractor and/or to transition the independent project certifier (IPC) to take over the role of the developer as project manager via the Security Trustee upon the occurrence of a trigger event, to ensure completion of the development project. Furthermore, strong underlying local housing laws, project economics and other available structural features will enable the transaction to promptly meet ongoing development expenses, periodic profit payments and principal obligations.
Based on 95% take-up rates (pre-issuance condition) for the two projects, we expect a net development profit of RM432 mil within the tenure of the Tranche 2 IMTN. The proposed RM323 mil issue size would translate to an advance rate of 74.7% against the expected development profit. This level of credit enhancement provides adequate cashflow buffers under a stressed scenario which include buyer defaults and decline in property prices in the event of recoveries that commensurate with an AA3 rating. Overall, buyer default risk in respect of progress payments is largely moderated as the majority of the buyers are end-financed by financial institutions.
The transaction incorporates the appointment of an IPC to ensure the Projects’ progress remains on track and within budget. Although currently slightly behind schedule, D’Quince Residences and D’Vervain Residences have passed the riskier pilling and sub-structure work stage and are on track for completion within the expected timeline, as confirmed by the IPC. As the Projects will not be furnished, the developer will require less time to complete the delivery of units post-construction. The 12- to 13-month gap between the developer’s targeted completion dates and the legal vacant possession dates should provide a sufficient buffer to mitigate potential construction delays. The fixed-price lump-sum contract diminishes any significant cost overrun risk. As ultimate sponsor of the transaction, Exsim has provided a Completion Undertaking to complete the Projects by the stipulated legal Certificate of Completion and Compliance dates.
Any material changes in the underlying assumptions may result in a change in the preliminary rating. These include changes with regard to the Projects, transaction structure, construction progress, indicative terms of the guarantee and underwriting facilities, and principal terms and conditions of the transaction. The assignment of the final rating will be subject to RAM’s satisfactory review of the final transaction documents as well as relevant legal and tax opinions.
Liew Kar Ling
(603) 3385 2586
(603) 7628 1162
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Ratings on Exsim Capital Resources Berhad