Published on 27 Oct 2021.
RAM Ratings has assigned a preliminary rating of AA3/Stable to the proposed RM315 mil third issuance (Tranche 3 IMTN) under Exsim Capital Resources Berhad’s (Exsim Capital or the 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 the SPAs will be used to fund remaining construction costs of the identified project, 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 3 IMTN will be backed by future SPA receipts from D’Erica Residences (the Project) in Damansara Perdana, comprising 1,143 residential units. While the terms of the programme allow for multiple tranches to be issued against a project, Exsim Capital has opted not to exercise this option and will only issue Tranche 3 IMTN when the Project achieves a take-up rate of 99%.
Concurrent with the Tranche 3 IMTN, Exsim Capital will also establish an unrated RM75 mil Sukuk Murabahah ICP (Tranche 3 ICP) facility under its RM1 bil Sukuk Murabahah ICP Programme. The unrated Tranche 3 ICP will act as a liquidity line to cover shortfalls in profit payments and senior expenses in respect of the Tranche 3 IMTN, construction cost overruns and/or timing mismatches between the Project’s development costs and progress payment receipts. The Tranche 3 ICP will be underwritten by a financial institution rated AAA/Stable/P1 by RAM Ratings, to be identified prior to issuance, and will not be guaranteed.
In assigning the preliminary issue rating of AA3 for the Tranche 3 IMTN, we have considered the 99% project take-up rate requirement, an adjusted default frequency of 7.2%, an adjusted market value decline of 43.8% and the transaction structure’s ‘step-in’ mechanics. The mechanics allow sukukholders to appoint a new contractor and/or 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. The strong underlying local housing laws, project economics and other available structural features will ensure prompt payment of ongoing development expenses, periodic profit and principal obligations under the transaction.
Based on the project’s take-up rate of 99%, the remaining development profit of RM418 mil as at end-July 2021 is adequate to support the full repayment of the proposed RM315 mil Tranche 3 IMTN in an AA3 stressed rating scenario. This translates to an advance rate of 75.3%. The stressed rating scenario reflects moderate buyer default risk, given the substantial proportion of units end-financed by financial institutions and the decline in property prices in the event of recoveries, commensurate with the assigned rating. RAM’s cashflow assessment also assumes a higher cost overrun and longer delay in collections as compared to the Tranche 2 IMTN, as construction is in the early piling and substructure stage, a phase which is often riskier and a common cause of delays and cost overruns.
The transaction incorporates the appointment of an IPC to ensure the Project’s progress remains on track and within budget. Although 46 days behind schedule based on progress report dated 10 August 2021, work progress is expected to catch up during the superstructure phase, enabling the Project to be completed within the scheduled timeline, considering the mitigation plans in place. The IPC views this as possible in light of the remaining construction period of 29 months as at end-August 2021. Accordingly, Exsim has not granted the contractor any Extension of Time (EOT) at this juncture.
All the contractor’s workers have been fully vaccinated since September 2021, allowing the Project to operate at full capacity moving forward. The eight-month gap between the developer’s targeted completion date and the legal vacant possession date provides a sufficient buffer to alleviate potential construction delays, particularly as furnishings are not required. 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 Project by the stipulated legal Certificate of Completion and Compliance date.
Any material changes in the underlying assumptions may result in a change in the preliminary rating. These include changes with regard to the transaction structure, construction progress, indicative terms of the underwriting facilities, and principal terms and conditions of the transaction. The assignment of a final rating will be subject to RAM’s satisfactory review of the final transaction documents as well as relevant legal and tax opinions.
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Ratings on Exsim Capital Resources Berhad