Published on 21 Sep 2022.
RAM Ratings has downgraded to C3 the ratings of the RM345 mil Tranche A1 to A4 Sukuk (collectively, the Tranche A Sukuk) under Menara ABS Berhad’s (the Issuer or Lessor) RM1 bil Sukuk Ijarah Programme (2008/2023) (the Sukuk) while maintaining the negative outlook on the ratings.
The rating downgrades are premised on the prospect of a likely default, given challenges faced by the Issuer in realising sufficient disposal proceeds to redeem the Tranche A Sukuk by legal maturity date, notwithstanding the moderate loan to value ratios afforded by the pledged collaterals. Outlook on the Tranche A Sukuk ratings remains negative, reflecting imminent default of the sukuk based on the current progress of the asset disposal exercise with less than six months left to legal maturity.
Since the initiation of the marketing process in February this year, the Issuer and CBRE WTW Real Estate Sdn Bhd have secured a buyer for TM Taman Desa at a purchase price of RM35.3 mil but none for Menara TM and TM Semarak. As Menara TM contributes 74% of portfolio value (based on 2021 market valuations), the transaction relies heavily on the sale of this asset to ensure full redemption of the Tranche A sukuk. Based on estimated gross sale proceeds from TM Taman Desa and available cash reserves as at 30 June 2022, there are sufficient funds to redeem only around one third of the RM345 mil outstanding Tranche A Sukuk by legal maturity.
On 23 February 2022, Telekom Malaysia (TM, the Master Lessee) exercised its right to acquire only TM Cyberjaya for RM44.75 mil and extend leases on small parts of Menara TM and TM Taman Desa (around 13%-38% of net lettable area, respectively). Assuming the majority of existing non-TM tenants renew their leases, Menara TM’s occupancy would stand at 46% and TM Semarak’s average occupancy at 28% post-expiry of the master lease. Amid the oversupplied office property market, potential vacancies and the shorter lease caused the portfolio’s latest market valuation to fall 23.6% to RM802 mil in the last review period. RAM’s adjusted valuation (revised in July 2021) of the portfolio of RM539.5 mil factors in weaknesses in the office sector and the poorer credit quality of the underlying properties.
We understand that no other contingent plans are being contemplated at this juncture, including the provision of special funding by Tranche C sukukholders to redeem Tranche A sukuk. The Issuer has indicated that it is in the midst of preparing a resolution for sukukholders’ approval to extend the transaction’s legal maturity, the details of which are not currently available. Any such extension will be viewed as a distressed exchange under RAM’s definition of default as the Issuer fails to honour its original payment obligations as outlined in the sukuk trust deed, resulting in an economic loss to sukukholders. We will however reassess the ratings if the extension of legal maturity can be completed before the original payment date, subject to the terms of the extension.
(603) 3385 2517
Tan Han Nee
(603) 3385 2529
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