Malaysia Fund: RHB Islamic Bond Fund Steps Out of Recommended Fund

Key Points:

• RHB Islamic Bond Fund (the Fund) invested RM8 million nominal value in Ample Zone Class C Sukuk, and constituted 13.65% of the fund size.
• The credit rating of this Class C Sukuk has been downgraded by Malaysian Rating Corporation Bhd (MARC) from B+IS to B-IS.
• This reflects that there is a heightened risk that the Class C Sukuk may fail to honour repayment when it matures on 27 January 2012.
• We remain unclear on whether RHB Islamic Bond Fund will do any impairment or write-down if Ample Zone fails to repay its repayment in January 2012.
• We advise potential new investors not to buy into this Fund.
• We will also remove the Fund as our Recommended Fund under the category of Malaysia Bond Islamic.
• Our advice for existing unit holders, after considering the potential default of Ample Zone is to switch to another Islamic bond fund. Fund to consider is AmBon Islam. 
   
   
  What is Our Concern?
  As at 30 September 2011, RHB Islamic Bond Fund (the Fund) has an investment in Ample Zone Class C sukuk of RM5 million and RM3 million holdings in nominal value which were purchased on 13 May 2005 and 18 May 2005 respectively. Ample Zone Class C Sukuk is the largest holdings of the Fund and constituted 13.65% of the fund size. 
  
  
  The credit rating of this Class C Sukuk has been downgraded by Malaysian Rating Corporation Bhd (MARC) from B+IS to B-IS to reflect that there is a heightened risk that the Class C Sukuk may fail to honour repayment when it matures on 27 January 2012. 
  
  
  Who is Ample Zone?
  According to MARC, Ample Zone is a special purpose vehicle established in 2005 for the sole purpose of raising fund via issuance of RM150 million Sukuk (refer to Table 1). 
  
  
  Table 1: Breakdown of Ample Zone Sukuk 

          Class A                        RM50 million
          Class B                        RM25 million
          Class C                        RM75 million
          Class D                        RM150 million
Source: MARC, iFAST compilations

The proceeds from the Sukuk were used to acquire four properties, namely,

1. Menara Maxisegar
2. Wisma Talam
3. Midpoint Shopping Complex
4. Pandan Kapital Shopping Complex

The properties were subsequently leased back to the respective sellers, which includes three subsidiaries of Trinity Corporate Bhd (Trinity - formerly known as Talam Corporation Bhd) and one private company.

As Wisma Talam was disposed in January 2008, the RM50 million Class A Sukuk and part of Class B Sukuk were redeemed at the same time. The remaining properties supporting the Sukuk are Menara Maxisegar, Midpoint Shopping Complex and Pandan Kapital Shopping Complex, which are now leased to Trinity. 

How is The Sukuk Structured?

Based on MARC, Ample Zone Class C Sukuk was structured based on expected cash surplus from the rental payments, after profit payments to the Class A and B Sukuk and all relevant expenses of Ample Zone.

An Option Agreement is given by Trinity to the Sukuk Trustee, where the Sukuk Trustee can require Trinity to purchase the properties if the sellers fail to honour their payment obligation. 

If Trinity are unable to honour its obligations on exercise of the Option Agreement, property agents will be appointed by Sukuk Trustee or Ample Zone to dispose off the properties in order to raise proceeds to meet the payment obligations for the Sukuk.

Why Ample Zone May Miss The Repayment?

Due to the continued non-payment of rentals from Trinity, the Sukuk Trustee has exercised the option given by Trinity to require Trinity to purchase the properties. However, due to its strained financial position, Trinity will only be able to honour its obligation by disposing the properties to external parties. 

Referring to the announcement from MARC, the Sukuk Trustee has initiated the disposal of the remaining three properties since 1Q 2010 but has not been successful in concluding a sale of any of the three properties. Ample Zone, the issuer of the Sukuk, is dependent on the disposal of properties to meet its repayment obligations that are due on 27 January 2012. As such, failure to dispose the properties before the payment date may trigger Ample Zone to default on its repayment. Total repayment for Class B and Class C Sukuk amounted to RM88.5 million, of which RM84.6 million relates to principal repayment.

What Are The Impacts to RHB Islamic Bond Fund?

As there is insufficient information on occupancy rates, rental rates and tenant diversification, current market value of these three properties cannot be estimated. Based on MARC’s valuation in 2006, the market value and the forced-sale value of the three properties are RM176.0 million and RM139.2 million respectively. This is more than enough to cover the RM88.5 million of repayment.

Table 2 shows the possible treatments of RHB Islamic Bond Fund in recoginising the Sukuk Value under different assumed situations.

Table 2: Impacts to RHB Islamic Bond Fund under different assumed situation
              Situations                                               Possible Treatment
1. Manage to dispose the properties before            No impairment and write-down
    payment date and the proceed is enough 
    to repay RM88.5 million. No default on 
    Ample Zone Sukuk    

2. Manage to dispose the properties before           Possible impairment or no action taken
   payment date but the proceed is only 
   enough to repay part of RM88.5 million.
   Partial default on Ample Zone Sukuk 

3. Not manage to dispose the properties               Possible impairment or write-down or no action
    before payment date.                                        taken
    Default on Ample Zone Sukuk  

Source: iFAST assumptions

We believe that situation 2 and 3 are likely to happen going forward. The adverse impacts to RHB Islamic Bond Fund are much depended on the treatment of the Fund in recognising the Sukuk value after the default. The Fund may impair or write-down the Sukuk value after the default or may have no action taken due to the reason that the Sukuk is pledged by properties, which could be disposed later and subsequently repay the Sukuk holders. 

Having said that, we remain unclear on whether RHB Islamic Bond Fund will do any impairment or write-down if Ample Zone fails to repay its repayment in January 2012. Any impairment or write-down will trigger a sharp decline on the Net Asset Value (NAV) of the Fund.

Remove RHB Islamic Bond Fund as Recommended Fund

Going forward, the outlook for RHB Islamic Bond Fund remains uncertain and the Fund faces the risk with regards to impairment or write-down of the Ample Zone Class C Sukuk. As such, we advise potential new investors not to buy into this Fund. Meanwhile, we will also remove the Fund as our Recommended Fund under the category of Malaysia Bond Islamic.

In our previous article, Dissecting The Recent Drop in RHB Islamic Bond Fund, we advised existing unit holders of RHB Islamic Bond Fund to hold on the Fund. Our advice for existing unit holders, after considering the potential default of Ample Zone is to switch to another Islamic bond fund. Fund to consider is AmBon Islam. (Source: fundsupermart.com)