One of the pioneering transactions in Malaysia's emerging ABS market has hit trouble. Ratings Agency Malaysia (RAM) last week placed all four public tranches totaling M$108.5 million ($29.6 million) on the ABS Land & Properties deal - Malaysia's first liquidating real estate asset securitization - on ratings watch negative.
The transaction, which was launched in February 2004, saw the securitization of M$237 million worth of properties owned by local conglomerate Sunway Holdings. Full repayment of principal and interest on the ABS paper is dependent on the sale of assets and cash flow generated on the underlying properties.
However, in a report submitted to RAM for the 12-month period ending in April, property manager City Valuers and Consultants - responsible for disposal, management and subletting of the properties - said it had failed to meet its second year performance targets.
Under the servicing agreement, City Valuers needed to achieve earnings of M$88.2 million through sales and rentals. The actual figure for the financial year ending April 2006 was just M$14.4 million.
Consequently, RAM made its decision based on the "heightened liquidity risk" to the deal from "slower than expected pace of property disposal as well as deterioration in the outlook for assets within the portfolio."
Worryingly, the report also pointed to a drop in value by 15% to 30% for select properties in the pool, which will impact revenues from future sales. Additionally, based on budgets for the next 12 months, rental income will be insufficient to cover interest payments - ranging from 4.75% for the triple-A notes to 7.5% for the A3-rated paper - and property expenses.
According to RAM, the situation is such that, without significant collateral performance, leverage will worsen "beyond levels commensurate with the ratings of the notes." The agency added a downgrade would occur should there be no improvement in the pace of disposal.
It is clear that drastic measures are needed to ensure obligations to investors are met. The transaction documentation issued at launch stipulated that, "failure to meet certain performance targets will result in the immediate dismissal of the property management."
To the outsider, generating earnings of just 16% of the target level would constitute serious failure by the property manager. However, City Valuers is still in place - for now - and is being advised by bankers on how to make up for the current shortfall.
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