RAM Ratings reaffirms MRCB Southern Link’s Senior and Junior Sukuk ratings

“The negative outlook on both ratings signals the potential for further deterioration in the ratings as a result of a weaker cashflow position should there be any delay in its refinancing exercise. The differential between the ratings of the Senior and Junior Sukuk reflects the Junior Sukuk’s subordinated status from a legal perspective.

“MRCB Southern Link is a funding conduit for the 8.62-km Eastern Dispersal Link (EDL) in Johor Bahru.

“The reaffirmation of the ratings is premised on the inroads that the Company has made with a debt-refinancing exercise. If the Company fails to complete the refinancing exercise by end-2015, a default on the Junior Sukuk is expected at end-December 2016, and a default on the Senior Sukuk at end-June 2019. As such, the ratings of the sukuk will face downward pressure if the refinancing exercise is not concluded by the end of the year. Elsewhere, as an interim measure to stave off a liquidity crunch, the Company procured bank guarantees (BG) amounting to MYR 90 million on 27 January 2015 to substitute the cash reserves in its finance service reserve accounts (FSRAs). As such, the Company was able to utilise these cash reserves for ongoing debt repayment as well as to support working-capital requirements.

“Since the commencement of tolling on the EDL on 1 August 2014, the Expressway’s monthly traffic volume has been volatile owing to toll-rate hikes on the JB-Singapore Causeway and the higher Vehicle Entry Permit fee imposed by the Singapore government. Compared to the last 5 months of 2014, the annualised average daily traffic (ADT) on the EDL had declined 1.7 per cent in the first 5 months of 2015. We anticipate a minor contraction in the volume of traffic on the EDL for 2015. Thereafter, we expect ADT growth to recover to between 2 per cent and 3 per cent per annum in 2016 and 2017, respectively. Elsewhere, the VEP fee planned by the Government, which has yet to be formalised, may negatively impact traffic volume on the EDL.

“Given the initial underperformance of traffic on the EDL in 2014 subsequent to the imposition of toll charges and our expectations of future traffic, the Company is envisaged to face liquidity stress. MRCB Southern Link will have to draw down the Junior Sukuk Special Reserve Account BG (of MYR 20.43 million) by end-2015 to provide the Company with temporary liquidity respite.”

(C P I Financial / 26 July 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com

Margin, scale issues to hit smaller Islamic insurance players

Dubai: The enhanced regulatory environment across GCC is expected to result in a surge in costs associated with the implementation of the regulations impacting the profitability of takaful players hard, especially the smaller players.

Implementing the existing regulatory developments will raise costs because of the need to hire expertise, combined with the administrative costs related to meeting the requirements for listed companies.

“We consider that introducing measures to align local regulations may mitigate some of the costs related to adopting the various regulatory requirements and would encourage insurers to focus on capital management and improve pricing discipline,” Ali Karakuyu, an analyst at Standard & Poor’s, said.

According to S&P profitable insurance companies in the GCC region (mostly large, conventional insurers) tend to rely on group medical business or policies that provide significant commission income from reinsurers. Only a few major local insurers can access this profitable commercial business; the smaller players, including the takaful companies, do not have a track record of servicing such contracts and lack the capacity to do so.

This leaves all the small players in the region, including takaful companies, reliant on retail business — mostly motor — sourced from agents charging high commissions.

“We consider that few companies will be able to build a credible business or financial profile from retail business alone, without a cost-effective distribution channel. Furthermore, we find that smaller insurers’ competitive and capital positions are more susceptible to one-off failures,” Karakuyu said.

Analysts say expense ratios of takaful players could rise even higher when additional fees charged by shareholders to manage the policyholder fund (wakala fees) are added. Shareholders at some companies are charging between 15 to 20 per cent of the gross premium (known as gross contributions).

Compared with more-developed markets, the GCC region’s insurers have high tolerance for high-risk assets. The new regulations include limits on the use of such assets, which could mean lower, but more stable investment returns for some players. In Kuwait, insurers must now hold a higher ratio of liquid assets, sufficient to cover their technical liabilities. Although the UAE still permits significant holdings in equity and real estate, which are considered as high-risk assets, liquid assets must cover gross technical reserves. In a market that makes heavy use of reinsurance, liquid asset coverage is considered a prudent measure.

Analysts say in the context of rising costs and competitive pressures, key shareholders may reconsider their long-term commitment to the takaful sector. Some of them entered the industry to maximise the returns on their real estate and equity holdings. In effect, in many cases board members consider underwriting performance secondary to investment performance. Weak technical profitability was not seen as a key threat to the capital base.

“While core shareholders have not yet indicated that they are considering selling their stakes, we see increasing evidence that they are less willing to inject more capital to help takaful providers meet the enhanced regulatory requirements, given their generally marginal results,” Karakuyu said.

“Family ownership of takaful providers remains one of the main obstacles to mergers and acquisitions. High market valuations, relative to book value, also reduce the incentive to merge, especially in Saudi Arabia.

(Gulf News Banking / 26 July 2015)

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Alfalah Consulting - Kuala Lumpur: www.alfalahconsulting.com
Consultant-Speaker-Motivator: www.ahmad-sanusi-husain.com
Islamic Investment Malaysia: www.islamic-invest-malaysia.com