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RAM Ratings revises Outlook on Menara ABS' Sukuk to Negative

May 14, 2014

RAM Ratings has revised the outlook on the long-term ratings of Menara ABS Berhad's Tranches A2, A3 and A4 Sukuk to negative (from stable) and maintained the outlook on Tranches A1 and B Sukuk at stable. Concurrently, it reaffirmed the ratings of Tranches A1, A2, A3, A4 (collectively known as the Tranche A Sukuk) and Tranche B at AAA, AA2, A1, A2 and AAA, respectively.

Menara ABS is a trust-owned, special-purpose vehicle incorporated solely for this sale-and-leaseback transaction involving 4 properties - Menara TM, Menara Celcom, TM Taman Desa and TM Cyberjaya (collectively, "the Properties") previously owned by Telekom Malaysia Berhad (TM or the Group). Profit payments on the Tranche A Sukuk are covered by lease payments from TM while the principal redemption will be met via proceeds from either refinancing, repurchase by TM or disposal of the Properties in the open market. Meanwhile, the principal redemption and profit payments on Tranche B are met by the lease payments from TM, the credit profile of which therefore underpins this tranche's rating and outlook.

RAM Ratings' negative outlook on Tranches A2, A3 and A4 signals the potential revision in our adjusted valuation of the Properties, which may face a material squeeze on their net property income (NPI) margin in the medium term. The narrower NPI margin stems from the higher-than-assumed maintenance cost for Menara TM's Convention Centre and the recent revision in assessment tax rates for buildings in Kuala Lumpur. RAM Ratings said, "We are also concerned about the possible lengthy time span before Menara Celcom can recover its full occupancy following the relocation of its sole tenant, Celcom Axiata Berhad, likely in 2H 2016. RAM therefore expects minimal upward potential for the Properties' NPI over the medium term, particularly with the possible rental pressure arising from a glut in the Klang Valley office sector. That said, the AAA rating of Tranche A1 still commensurate with its more-than-adequate debt service and asset coverage levels.

"For this review, RAM has maintained the portfolio's adjusted valuation at MYR 656.2 million; the resultant cumulative loan-to-value ratios and stressed debt service coverage levels therefore remain in line with their respective ratings. The ratings also take into account the minimal counterparty risk given TM's role as the Master Lessee in the 15-year Master IjarahAgreement with Menara ABS. We note that TM promptly settled its RM75.2 million of lease payment obligations in fiscal 2013. However, we will revise our adjusted valuation should we see no significant improvement in the portfolio's performance in the next 1 to 2 years; the adjustment will likely result in a 1-notch rating downgrade for Tranches A2, A3 and A4."

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Source: CPI Financial

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