PETALING JAYA: Smaller property developers will no longer need to just rely on bank financing to ease their cash flows. They can monetise upfront the cash flows of their billings via a bond issue that potentially takes away businesses from banks.
At the moment, developers realise their profits progressively as construction is carried out. This ties up their capital and it can be up to three years before the project is completed.
Most of the smaller developers depend on short-term bank loans for additional capital while the bigger companies issue bonds based on their credit strength.
A new bond issue is coming onto the market that essentially allows developers to monetise cash flow from the billings upfront. Smaller developers that are seeing strong sales of their projects will no longer need to rely on more expensive bank financing to ease their cash flow.
“It would be helpful for smaller developers who do not need to rely on bank financing which is more expensive and short term in nature. They can realise some cash upfront depending on sales of the project,” said a source.
Sources said that SkyWorld Development Sdn Bhd is the first developer to embark on a bond issue, which is structured and based on a programme for gradual draw-down.
NewParadigm Capital Markets Sdn Bhd, a financial boutique advisory firm, has been working on the structure for two years and is said to have received all regulatory approvals.
SkyWorld is raising some RM50mil under Tranche 1 of the RM600mil Sukuk Musharakah Programme via a special purpose vehicle, SkyWorld Capital Bhd, for its SkyAwani Residence development located in Sentul, Kuala Lumpur. The project has achieved 100% sales, which allows for the bond to be structured.
It will mark the first structured Shariah-complaint finance programme anchored on billings from property progress payments.
It is learnt that the sukuk is to only finance the SkyAwani development, not all of SkyWorld’s developments.
RAM Ratings Services Bhd has assigned a preliminary AA3/Stable rating for this Sukuk, while Danajamin Nasional Bhd is guaranteeing the support facilities.
Tranche 1 will have a tenure of two years with a yield of below 5%, said the source.
While the exact key indicators have yet to be announced, it is learnt that RAM Ratings has adopted a rigorous and strict methodology in accounting for the risks of this Sukuk.
Meanwhile, the support facilities which encompasses issues such as working capital, construction over-runs and liquidity issues will be underwritten by Alliance Investment Bank Bhd, which is ultimately guaranteed by Danajamin.
It is understood that the SkyAwani project has achieved a 100% take-up rate for its 1,250 units in Sentul. Thus, SkyWorld’s Sukuk is collateralised against these 1,250 sales & purchase agreements (SPAs), all of which also already come with end financing.
The SkyAwani Residence project is a Rumah Mampu Milik Wilayah Persekutuan project (RUMAWIP). RUMAWIP are is an affordable housing projects scheme promoted by Kementerian Wilayah Persekutuan where house prices which are capped at the RM300,000 level.
The source said that this sukuk financing programme is available to developers who have achieved strong salesof their projects, with end-financing would be eligible for this Sukuk.
It is believed that the financial adviser is only looking at residential units, as the default rates are a lot lower.
“This will disrupt property financing in Malaysia, especially for bankers depending on businesses from small developers. Typically, developers need to wait for the 3 year construction period before they are able to collect their portion of the development cash flows. For the smaller developers, liquidity is a huge issue,” sources said.
When contacted, NewParadigm said that was unable to comment at this point in time.
It is learnt that the initial buyers for the Sukuk will be the institutional investors. Subsequently the retail public may also be allowed to subscribe for this type of structured Sukuk since it is highly rated and has rigorous ring fencing to ensure investors’ interest is protected at all times.
This move is in line with the SC’s plan, where it is looking to allow retail investors to participate in the wholesale bond and Sukuk market from next year.
Currently, only institutional and high net-worth investors participate in the wholesale bond and Sukuk market.
If this move is allowed, interested retailers will be able to earn higher returns compared to conventional fixed deposits in banks. Figures from RAM Ratings show that corporate bond default rate last year stood at only 0.5%, following no recorded defaults since 2013.
SC chairman Tan Sri Ranjit Ajit Singh had previously mentioned that the SC is looking to further liberalise rules to enable greater retail participation in the corporate bond and sukuk market within the first three months of 2018.