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MARC downgrades MK Land's RM300m bonds

Malaysian Rating Corporation Bhd (MARC) has downgraded the ratings of MK Land Holdings Bhd's RM300 million serial bonds tranche 1 and 2 to A- with a negative outlook.

MARC said on Jan 16 the downgrade is premised on weaker sales from the Groupís Damansara Perdana and Damansara Damai projects which has contributed to declining profits and margins and the soft property market outlook.

"The Negative Outlook reflects the challenges facing MK Land in meeting sales targets due to the current weak market sentiment which raises concerns over the Groupís ability to meet its debt obligations in 2007," it said.

MARC said exacerbating the situation has been the negative impact from the late delivery of units in its Flora Damansara Development.

MK Landís core activities are property development, leisure and investment holdings. The Group has a sizeable land bank amounting to 2,191.2 hectares (5,478 acres).

It is a leading property developer with projects in Selangor, Perak and Kedah. Its flagship developments are Damansara Perdana and Damansara Damai which have contributed significant revenues in the past due to their locations and accessibility.

Take-up rates, however, have dipped significantly since the middle of 2005 for both developments.

MK Landís Armanee Terrace Condo 1B in Damansara Perdana has registered a take-up rate of only 26.9% since its initial launch in June 2005 while its Season Square Condo A in Damansara Damai has recorded a take-up rate of only 14.3%.

The same trend has been noted from the Groupís first quarter (1Q) FY2007 interim results. Sales continue to be weak with the Group recording only RM14.9 million from these two projects.

The Sinking Fund Account (SFA) balance stood at RM26.1 million as at November 28, 2006 which meets one of the two SFA requirements to cover the bond redemption of RM50 million scheduled for September 2007.

MK Land is required to deposit RM30 million by May 2007 and an additional RM25 million into the SFA by June 2007.

Under the issue structure, the Group is required to maintain sufficient billings to reflect a security coverage ratio of 1.43x for the outstanding bonds. With the outstanding bonds totalling RM170 million currently, this translates to RM243.1 million of remaining billings. MK Land has represented that it has met the security coverage requirement.

MK Land recorded a 54.9% drop in revenue to RM408.5 million in FY2006 with PBT (profit before tax) also declined by 64.4% to RM58.6 million. Operating margins reduced to 17.09% from 19.24% in FY2005.

During the year under review, the Group has made provision for liquidated ascertained damages of RM13.4 million due to delays in completion of certain phases in Damansara Perdana and Damansara Damai.

On a positive note the Groupís leverage levels continue to remain low at 0.41 times, well below the covenanted level of 2.5 times.

Going forward, MARC is concerned that the weak property market outlook into 2007 may continue to impact sales for the Group which will lead to shortfalls in the SFA and difficulty in maintaining the minimum security coverage ratio.


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