RAM Ratings has reaffirmed the AAA rating of Golden Crop Returns Bhd's Series 1 Sukuk Al-Ijarah. At the same time, the ratings of the company's Series 2, 3, 4 and 5 sukuk have been upgraded to AA1, A1, A2 and BBB1, respectively, from AA2, A2, A3 and BBB2. Concurrently, RAM Ratings has lifted the Rating Watch (with a positive outlook) on the Series 2 to 5 sukuk; the Rating Watch had been in place during our review on the prices of crude palm oil (CPO).

Golden Crop is a special-purpose, bankruptcy-remote company that had been set up as the financing vehicle for this sale-and-leaseback transaction involving 17 estates and five mills (plantation assets) belonging to entities within the Boustead Holdings Berhad Group.

Each Series comprises a Tranche 1, Tranche 2 and Tranche 3 Sukuk with maturity profiles of 3, 5, and 7 years, respectively. The ratings reflect the likelihood of timely payments of periodic distributions under the transaction, as well as the full redemption of the sukuk by the legal maturity dates.

"The rating upgrades are premised on improvements in the plantations' sustainable cashflow, pursuant to the revision in RAM Ratings' CPO price assumption, as well as expected yield increases from plantations in Sabah, which account for 68% of the company's total hectarage," said the rating agency.

RAM Ratings' assumption vis-a-vis sustainable CPO price was revised from RM1,200 per tonne in January 2007 to RM1,600 per tonne in June 2008, based on several key developments within the industry, including augmenting CPO demand from fast-growing economies, changes in import tariffs and the switch to renewable energy sources given the escalating price of crude oil.

"The sustainable cash flow of the plantation assets has appreciated to RM60.2 million, from RM56.8 million in our last review in May 2007. The more robust sustainable cash flow and corresponding increase in adjusted valuation have translated into lower loan-to-value and higher debt-service cover ratios for the sukuk," it added.

Industry-wide production of fresh fruit bunches (FFB) decreased marginally in 2007, due to the effects of flood damage early in the year and a cyclical downturn in crop production, brought about by biological tree stress.

Consequently, average FFB yield per hectare fell from 19.6 tonne/ha in 2006 to 19 tonne/ha in 2007. Likewise, Golden Crop's FFB yield also decreased from 21.3 tonne/ha to 19.9 tonne/ha over the same period. "While yields in 2007 were slightly below our stress assumptions, they were in line with industry performance and not due to factors that are expected to prevail over the longer term," said RAM Ratings.

The rating agency noted that lower FFB yields in 2007 were more apparent in Peninsular Malaysia, where estates contain a large percentage of trees in the past-prime category. "We note that yields from Sabah estates, which generally have more fertile land and better-yielding tree profiles, had not declined as much," it added.

To date, the lessees in this transaction have made timely and adequate payments on their lease obligations, enabling Golden Crop to meet its semi-annual periodic distributions to the Sukukholders and Lembaga Tabung Angkatan Tentera ("LTAT"), i.e. the Musyarakah facility provider, it added.

Meanwhile, the windfall tax on oil palm companies, which was imposed effective July 1, 2008, is not expected to significantly affect the financial standing of the lessees in this transaction.

On Jan 29, 2008, Boustead Eldred Sdn Bhd and Boustead Rimba Nilai Sdn Bhd — the lessees of the Malakoff and Bebar estates — served notice to Golden Crop on the exercise of their three-year call option. On June 23, both companies inked a sale and purchase agreement to acquire the estates for RM133.5 million in total. Golden Crop stands to receive RM112.9 million from this sale, after the deduction of RM20.6 million of ownership expenses incurred by Boustead Eldred and Boustead Rimba Nilai; the sum includes upkeep and cultivation costs, as well as replanting expenditure.

The proceeds from the disposal are expected to be deposited into the Ijarah Service Reserve Account in October 2008, and will be used to redeem the RM110 million Tranche 1 Sukuk in November 2008.

RAM Ratings highlighted the likelihood of further upward rating movement upon the redemption of the Tranche 1 Sukuk in November 2008, given the significant reduction in the debt obligations of Golden Crop then.

"Tranche 1 accounts for 25% of the total Sukuk issued under this structure. RAM Ratings will reassess the ratings and the performance of the Plantation Assets upon the redemption of the Tranche 1 Sukuk," it added.