Skyworld debt notes to monetise unbilled sales, rated AA3 by RAM

KUALA LUMPUR:  SkyWorld Capital Bhd has launched an Islamic debt note programme which is the first sukuk to monetise unbilled sales for executed property transactions, and the first to involve affordable housing.

RAM Ratings had on Monday assigned a final AA3/Stable rating to the first tranche of the RM50mil debt notes issued under its RM600mil IMTN Sukuk Musharakah programme. 

SkyWorld Capital is a subsidiary and special-purpose funding vehicle for SkyWorld Development Sdn Bhd (SkyWorld).

SkyWorld or its subsidiaries will, from time to time, sell – to SkyWorld Capital - their beneficial interest under the respective sale and purchase agreements (SPAs) signed with the buyers of specific property development projects. 

RAM Ratings said the future receipts under the SPAs will be used to fund the remaining construction costs related to the identified projects, as well as to meet the issuer’s fees, expenses and obligations under each sukuk. 

Concurrently, SkyWorld Capital will also undertake an unrated RM400mil ICP Sukuk Murabahah programme. It will act as a contingent line for its respective projects. 

This includes contingencies arising from shortfalls in the profit payment and senior expenses in respect of the relevant tranche of the Sukuk Musharakah, construction cost overruns and/or timing mismatches between the project’s development costs and the expected progress payments. 

All ICP issued under the relevant tranche IMTNs will be fully underwritten and guaranteed. 

For the tranche one of the IMTN, the ICP has been sized at RM41mil (Tranche 1 ICP); it will be guaranteed by Danajamin Nasional Bhd (rated AAA/Stable/P1) and underwritten by Alliance Investment Bank Bhd (rated A1/Stable/P1).

RAM assigned the AA3 rating after analysing the transaction structure and, in particular, considering the sukuk holders’ ability to replace the contractor - to ensure the underlying development project is completed. 

This, together with the strong underlying local housing laws and other structural features available as well as the solid project economics, allow SkyWorld Capital to promptly meet ongoing development expenses as well as the periodic profit payments and principal obligations. 

The Tranche 1 IMTN is secured against 1,260 SPAs executed for a yet-to-be-completed mixed development project comprising fpur residential towers and 60 commercial units of the SkyAwani development in Sentul, with an unbilled value of RM151mil. 

The project is built by SkyWorld's unit Citra Amal Sdn Bhd. 

The SkyAwani residential component is a Rumah Mampu Milik Wilayah Persekutuan (RUMAWIP) project, an affordable housing scheme with a ceiling price of RM300,000, which is markedly lower than those of comparable properties nearby. 

“Based on SkyAwani’s estimated remaining gross development profit of RM40.7mil to be collected within the sukuk’s tenure and the available cash in the relevant accounts, this translates into a 32.7% overcollateralisation ratio for the Tranche 1 IMTN. 

“This level of credit enhancement supports the adequacy of the cashflow under stressed scenarios - mitigating against buyer defaults and softer property prices in the event of recoveries - that commensurate with an AA3 scenario,” said RAM

RAM's applied default frequencies reflect the high proportion of the units that have already been sold (residential: 100%) and end-financed (residential: 96.33%; commercial: 88.24%) as at 31 October 2017. 

Of the end-financed units, 11.3% are serviced through government staff salary deductions. These factors substantially reduce the buyers’ default risk on progress payments. 

The transaction also incorporates the appointment of an independent project certifier (IPC) to ensure the project’s performance remains on track and within budget. 

Based on the latest construction progress report, SkyAwani is more than 70% completed and has already achieved topping-up, thus significantly reducing the risk of delays and cost overruns. 

Against the Tranche 1 IMTN’s expected maturity and SkyAwani’s targeted vacant possession (VP) in May 2019, there is a considerable nine-month time buffer given the developer’s targeted VP in August 2018. 

SkyWorld is a relative newcomer to the property sector, with a limited track record. 

“Since its rebranding in 2013, it has chalked up a RM1.97bil of upcoming project launches (based on gross development value), deliverable over the next four years – a target we view to be ambitious,” RAM said

Excluding SkyAwani, SkyWorld has three other ongoing projects and recently completed its first one, three months ahead of schedule. 

As at end-September 2017, SkyWorld’s respective gearing and operating profit before depreciation, interest and tax (OPBDIT) debt coverage ratios stood at 0.97 and 0.76 times “which we expect will likely be maintained in the medium term, based on its current pace of expansion”. 

RAM also pointed out SkyWorld’s property launches had achieved strong take-up rates within a short period, providing upside potential to its financial metrics as its existing developments approach completion.

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