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Friday, 12 August 2016

RAM Ratings reaffirms ratings of Axis REIT Sukuk’s MYR 110.0 million first Sukuk

With the revision of RAM’s stressed refinancing rate to 8.5 per cent (from 10.0 per cent), the stressed debt-service coverage ratios (DSCRs) have increased substantially. Nevertheless, the ratings remain constrained by the loan-to-value (LTV) ratios, which are still consistent with our benchmarks for the relevant ratings.
The reaffirmation is premised on the overall stable net property income (NPI) of the portfolio, supported by the underlying properties’ strategic locations, longer-than-average lease maturities and healthy demand for the portfolio’s assets due to the shortage of comparable properties. ARSB is a special-purpose vehicle set up by Axis REIT as a funding conduit for its perpetual Islamic MTN Programme of up to MYR 3.0 billion (the Sukuk Programme). The First Sukuk – the first issuance under the Sukuk Programme – is backed by a portfolio of three industrial and industrial-office mixed properties and one retail property, i.e. Axis Steel Centre (ASC), Axis Vista (AV), Bukit Raja Distribution Centre and Tesco Bukit Indah.
The portfolio NPI of MYR 20.5 million in 2015 remained in line with our assumed NPI of MYR 20.0 million. Despite the present void at AV due to the recent departure of one of the portfolio’s six tenants (which accounted for 3.5 per cent of the portfolio’s NLA and 5.3 per cent of its revenue in 2015), we expect the portfolio’s stabilised annual NPI to remain in line with our initial assumptions. The average rental rates of the assets are still aligned with market rates while the portfolio’s adjusted capital value shows a discount of 31 per cent to its market value. Correspondingly, the cumulative LTV ratios of 43.7 per cent, 46.0 per cent, 48.3 per cent and 50.6 per cent coupled with the revised DSCRs of 2.5 times, 2.4 times, 2.2 times and 2.1 times (from 2.1, 2.0, 1.9 and 1.8 times) correspond to the respective AAA, AA1, AA2 and AA3 ratings of the Class A to Class D Sukuk.
We note overdue rentals of up to three and five months from two tenants in 2015 and 1Q 2016. However, these issues have been largely resolved – one tenant has caught up on its payments while the security deposit and auction proceeds have been used to offset the overdue rentals from the other tenant at AV. A replacement is currently being sought for the vacant space at AV. Our sensitivity analysis incorporates these factors as the basis for our reaffirmation. We have not accorded any benefit to the new lease agreement pertaining to ASC, which is currently in an advanced stage of negotiations.
The ratings are, however, moderated by limited asset diversity and significant tenant-concentration risk, as the portfolio only contains industrial-related properties, and three of the four Secured Properties are single-tenanted. These factors expose the transaction to the cyclicality of the industrial property segment and the risk of significant income loss should any of the tenants’ relocation result in protracted vacancies. Nonetheless, the fixed long-term tenancies are expected to provide cashflow visibility over the medium term. In fiscal 2015, the collective NPI of the two Secured Properties with fixed long-term tenancies amounted to almost 2.50 times of the transaction's profit obligations, and contributed close to 60 per cent of the portfolio’s rental revenue.

The ratings are also underpinned by structural features that enhance the liquidity and security of the transactions, e.g. minimum finance service coverage ratio (FSCR) requirements at the levels of both the Issuer and the sponsor, as well as other trigger mechanisms to accelerate recovery via proceeds from the disposal of the underlying portfolio. We note that the respective FSCRs of the Issuer vis-a-vis the First Sukuk and Axis REIT remained healthy at 4.04 times and 3.37 times (after adjusting for deposits related to acquisitions) as at end-2015.

(C P I Financial / 12 August 2016)
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Kenya: Lenders want new law for Islamic financing

Experts want Central Bank of Kenya to set separate regulations for Islamic banks to avoid operation and auditing challenges.

Prof Abdullatif Essajee, currently the CEO and Islamic Finance lecturer at Vision Institute of Professionals, has said Islamic banking has key differences from conventional banks and the two cannot be effectively regulated using the same framework.

 Former Managing Director at First Community Bank (FCB) and now a director at the same bank, Essajee said that most of the time, the external auditors differ with Islamic banks on presentation of several transactions in financial books.

 “We have reporting standards for Islamic banks but because the regime does not allow that, we have not fully embraced the substance of Islamic banking. 

The Islamic standards cannot change the fundamentals of reporting but could have enhanced the quality of reporting,” said Essajee. For instance, Islamic banks, where charging interest is prohibited, avoid terminologies such as interest income and instead go for financing income yet in their books, they are forced to use the term. 

The matter has been complicated by absence of CBK Sharia Supervisory Board that is supposed to keep in check the activities of Islamic banks. Essajee pointed out countries like Malaysia, where each bank has its own Sharia-compliant board that is answerable to a similar board by central bank.

In Kenya, despite the first Islamic product coming to the market a decade ago, the audit practice leans to the practices of conventional banks. 

According to Essajee, most of the high non-performing loans displayed on the financial statements of banks offering more Sharia-based loans, are due to differences in the practice of Islamic products and conventional products. 

“For example, in conventional banking, when financing a construction, banks can demand for payment even before construction is up. That cannot happen in Islamic banks yet when auditors come, they say ‘You issued a facility at this time and it is now almost 90 days and there is no payment so we need to downgrade it,” he explained. 

During his helm at FCB, he added, not so many auditors who came for the auditing process could succeed in borrowing from both conventional and Islamic practices. Under Islamic banking law, most lending is directed to a specific project and is premised on utmost good faith.

 Therefore, where the borrower delays paying yet he invested in a project he or she pre-agreed with the bank and is yet to be paid, Islamic banking laws cannot move to penalise the borrower.

 “It is not a matter of being soft, it is being ethical. If I (Islamic bank) gave you money to build road and the payer is another person and you haven’t been paid, how do I come to touch your property yet we need to work together to get paid?”

 he asked. This may shed light on the increased gross non-performing loans (NPLs) in some lenders that have embraced Islamic products. Half-year results released by NBK, which is one of the lenders with Islamic products, show that gross NPLs moved from Sh16.9 billion to Sh27.3 billion in just three months.

(Standard Digital / 12 August 2016)
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