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25 Jun | Thursday
Protracted delays in finalising lease renewals elevate refinancing risk for TM-sponsored property-backed RM1 bil Sukuk Ijarah

RAM Ratings highlights that the multiple extensions sought by Menara ABS Berhad (the Issuer or Lessor) to finalise its lease renewal offer to Telekom Malaysia Berhad (TM) – the Lessee for its portfolio of four assets – have compromised the efficacy of the transaction’s structure. Originally scheduled for no later than 15 January 2020, the Issuer has, in its latest request, proposed for the deadline to be extended further to 30 June 2020. The request is currently pending TM’s approval.
 
Under the terms of the transaction, the redemption of Tranche A Sukuk Ijarah on its expected maturity date of 15 January 2021 is to be met by the Issuer through refinancing (if TM opts for a lease extension) or via disposal proceeds if TM chooses to buy back all or any of the four assets (originally by 15 April 2020). If TM exercises neither alternative and decides to vacate and return the properties, the Security Trustee, acting as attorney for Menara ABS, has the right to put the assets up for sale to ensure full and timely redemption of Tranche A Sukuk by its legal maturity date of 13 January 2023.
 
With less than six months remaining to expected maturity date, refinancing risk is further heightened by the dispute between the Tranche A sukukholders and the Issuer’s representatives (directors of Menara ABS), over the appointment of the financial advisor for the transaction. The advisor had been appointed in May to consult on the key offer terms of the Lease and/or Purchase Option and to work out a refinancing scheme to meet redemption of the Tranche A Sukuk.
 
These developments, in our view, have severely diminished the effectiveness of the transaction mechanics and amplified refinancing risk. This, together with the already weak office property segment outlook, aggravated by the Covid-19 crisis, adds to our concerns on the possibility of lease repricing and adverse selection by TM if it chooses to renew its lease on or repurchase only part of the properties. RAM’s discussions with all stakeholders involved to date suggest that discussions are still on going. Based on the sukuk indentures, failure to meet Tranche A Sukuk redemption on the expected maturity date is tantamount to a Sukuk Dissolution Event.
 
We are currently conducting the formal annual rating review of the transaction, which we expect to conclude within a month. The RM85 mil Tranche B Sukuk, due on 15 January 2021, is serviced by surplus lease payments from TM after meeting Tranche A Sukuk profit obligations and, as such, reflects TM’s credit risks. The RM345 mil Tranche A Sukuk outstanding has a loan-to-value ratio of 25.6% based on the latest appraised value of the portfolio as at end-December 2019.
 
Menara ABS is a trust-owned special-purpose entity sponsored by TM to facilitate the securitisation of four of its properties – Menara TM, TM Semarak (formerly known as Menara Celcom), TM Taman Desa and TM Cyberjaya (collectively, the Properties) – via a sale and lease-back transaction. Purchase consideration for the Properties was funded via the issuance of Tranches A1 to A4 (collectively, the Tranche A Sukuk), Tranche B Sukuk and Tranche C Sukuk under Menara ABS’s RM1 bil Sukuk Ijarah Programme (2008/2023) (listed below).
 

Sukuk Ijarah Rating/
Outlook
Outstanding Amount
(RM mil)
Expected
Maturity
Legal
Maturity
Tranche A
Tranche A1 AAA/Stable 240 15 January 2021 13 January 2023
Tranche A2 AA2/Stable 55
Tranche A3 AA3/Stable 40
Tranche A4 AA3/Stable 10
Tranche B
Tranche B1 AAA/Stable Redeemed  
-
 
-
Tranche B2 Redeemed -
Tranche B3 85 15 January 2021
Tranche C Unrated 500 15 January 2021 13 January 2023

 
 
Analytical contact
William Tan
(603) 3385 2530
williamtan@ram.com.my
 
Media contact
Padthma Subbiah
(603) 3385 2577
padthma@ram.com.my
 

Date of release: 24 June 2020

 
The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.
 
RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings’ credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications.
 
Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.
 

Published by RAM Rating Services Berhad
Copyright 2020 by RAM Rating Services Berhad

source: RAM Ratings
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