Thursday, December 2, 2010

Newco for SunCity-Sunway to shoulder heavier debt burden, says RAM

KUALA LUMPUR: The new company (Newco) taking over the merged SUNWAY CITY BHD [] and SUNWAY HOLDINGS BHD [] will have to shoulder a heavier debt burden, says RAM Ratings Bhd.

Apart from their combined borrowings of RM1.3 billion as at end-September 2010, 'the Newco will need to raise another RM915 million of debt to fund the cash portion of its offer (80% of the offer will be funded via equity), it said on Thursday, Dec 2.

The ratings agency said this was estimated to translate into gross and net gearing ratios of about 0.6 times and 0.4 times, respectively.

'This ratio may move up progressively as the aggregate debts of the two entities are projected to rise to some RM2.0 billion-RM2.7 billion; nevertheless, this expectation may change, depending on Newco's future funding plans,' it said.

Based on RAM Ratings' preliminary assessment, Newco's stronger business profile should balance its weaker financial metrics. As such, its credit standing is not expected to deviate much from the credit profiles of Suncity and Sunway Holdings.

Sunway Sdn Bhd a private limited company, owned by Tan Sri Jeffrey Cheah ' founder of the larger Sunway Group ' and Sarena Cheah, had launched a corporate exercise to merge Suncity and Sunway Holdings.

The Newco had made a RM4.5 billion offer for the assets and liabilities of the two companies.

RAM Ratings said there was no immediate impact on the ratings and outlook SunCity's RM500 million debt notes and Sunway Holdings Bhd's RM500 million debt notes.

The debt notes are SunCity's RM500 million Murabahah commercial'' papers/medium-term notes programme (or Islamic CP/MTN) which have been rated at A2/P1, Stable.

Also included are Sunway Holdings' RM500 million CP/MTN 2010/2017. They comprise of up to RM100 million which will be guaranteed by OCBC Bank (Malaysia) Bhd for up to five years (Tranche 1),'' up to RM100 million guaranteed by RHB Bank Bhd for up to five years and up to RM300 million unguaranteed portion. They were rated AAA(bg)/ P1(bg);'' AA2(bg)/ P1(bg) and A2/P2 with stable outlook.

RAM Ratings said should the proposed offer be accepted and the exercise successfully completed, RAM Ratings expects synergistic benefits to arise from the merger.

Suncity is an established property developer within the upper-middle and high-end segments of the property market; its business profile is supported by stable rental income from its pool of investment PROPERTIES [] as well as dividend income and management fees from the Sunway Real-Estate Investment Trust (REIT).

Meanwhile, Sunway Holdings' forte is in the CONSTRUCTION [] business; it is also involved in quarry operations, trading and manufacturing, and property development.

The merger will create a larger and vertically integrated entity (Newco) with an entire value chain, encompassing both upstream to downstream activities, primarily in the property and construction businesses.

'We believe that Newco will be better poised to undertake bigger property projects and bid for larger construction contracts, both local and global.

RAM Ratings said as with any merger, integration risk cannot be entirely discounted. Nevertheless, both entities share similar cultures, having operated under the Sunway umbrella and with ongoing collaborations. This partly moderates the integration risk of this corporate manoeuvre.

At this juncture, this corporate exercise is not expected to have any immediate rating impact on the two entities' debt issues, pending further details such as more clarity on the management's plans vis-''-vis the debt facilities, which could entail their restructuring.

As this corporate exercise will breach some of the covenants under the two debt issues, bondholders' approval will also have to be sought in due course.

'RAM Ratings will maintain close monitoring of the relevant developments on the proposed offer. We will make the appropriate announcement once there is greater clarity,' it said.

No comments:

Post a Comment