(November 2008) MALAYSIAN RATING CORPORATION BERHAD Company No.: V RATING APPROACH TO SUKUK: A MARC PERSPECTIVE

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1 RATING APPROACH RATING APPROACH TO SUKUK: TO SUKUK: A MARC A MARC PERSPECTIVE PERSPECTIVE MALAYSIAN RATING CORPORATION BERHAD Company No.: V RATING APPROACH TO SUKUK: (November 2008) Contact: Milly Leong Chief Rating Officer milly@marc.com.my Page 1 of 16

2 OVERVIEW MARC regards Sukuk as certificates of investment. Our view of Sukuk falls in line with that of the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) which defines Sukuk as certificates of equal value representing undivided shares in ownership of tangible assets, usufruct (legal right to derive profit from property), and services or in the ownership of the assets of particular projects or special investment activity. Depending on the basic structure of the Sukuk, the Sukuk can exhibit characteristics of debt and/or equity or asset-backed securities if securitisation elements are present. Since 2001, MARC has also been assigning Islamic Sukuk ratings to fixed income Sukuk issuances. In common with MARC s conventional debt and Islamic debt rating scales, the longterm Sukuk rating scale comprises eight rating categories ranging from 'AAA IS ' to 'D IS ', while the short-term rating scale ranges from 'MARC-1 IS ' to 'MARC-D IS '. The differentiated Sukuk rating scale is consistent with our view that Sukuk are supposed to represent ownership interests in underlying asset(s) and the resulting returns from the asset(s). Prior to AAOIFI s pronouncement on Sukuk in February 2008, equity participation Sukuk based on Mudarabah and Musyarakah contracts have typically been configured in a manner which provides recourse to the borrower/originator through an undertaking to repurchase the underlying assets at a price representing the face value of the Sukuk at maturity or following an event of default. Shortfalls in periodic distribution amounts are similarly covered by the originator/borrower in the event insufficient returns are generated by the Sukuk assets. The pre-determined periodic distribution and redemption amounts for all MARC-rated Sukuk have allowed us to use conventional corporate debt, project finance or structured rating methodology to rate these transactions. AAOIFI s February 2008 pronouncement on Sukuk has far-reaching implications for the structuring of Syariah-compliance Sukuk as well as the rating approach for future structures. AAOIFI S PRONOUNCEMENT ON SUKUK In late 2007, Chairman of the AAOIFI board of scholars, Sheikh Mohammed Taqi Usami declared that some 85% of outstanding Sukuk had failed the Syariah-compliance test on the basis that they were asset-based rather than asset-backed with the guaranteed return of the face value of the Sukuk on maturity and in the absence of a transfer in asset ownership to Sukukholders. The rating agencies, MARC included, have long recognised the distinction between asset-based and asset-backed Sukuk, as indicated by their selective application of asset-backed securities rating methodology to Sukuk transactions. A more detailed pronouncement was issued by the AAOIFI in February 2008 which establishes stricter guidelines for the issuance of Sukuk as summarized below: 1) Sukuk issuances have to be backed by real assets, the ownership of which has to be legally transferred to Sukukholders in order to be tradable; 2) Sukuk must not represent receivables or debts, except in the case of a trading or financial entity selling all its assets or a portfolio with a standing financial obligation, in which, some debts owing by third parties, incidental to physical assets or usufruct, are unintentionally included; Page 2 of 16

3 3) The Manager of the Sukuk is prohibited from extending loans to make up for the shortfall in the return on the assets, whether acting as a Mudarib (investment manager), or Sharik (partner) or Wakil (agent); 4) Guarantees to repurchase the assets at nominal value upon maturity with the exception of Sukuk Al-Ijarah (leaseback) structures are also prohibited; and 5) Closer scrutiny of documentation and subsequent execution of the transaction is required of Syariah Supervisory Boards (SSBs). A predictable outcome of the stricter principles for Sukuk issuance would be an increasing trend towards securitisation, and perhaps emergence of variable-income Sukuk which reflect risk participation in project outcomes or asset performance. The performance of post-aaoifi pronouncement Sukuk issuances will depend less on the creditworthiness of the originator/borrower and more on the performance of the assets or project as in the case of asset-backed securities or non-recourse project financing. MARC views infrastructure projects generating predictable cashflows as appropriate for risk participation Sukuk based on Mudarabah and Musyarakah contracts. These include mature toll roads, water treatment facilities and certain power projects. MARC believes that there will be eventually a need to differentiate fixed-income from variableincome Islamic financial instruments from a rating perspective, particularly in light of the differences in the degree of security of principal and predictability of financial returns. The rating opinion which we provide on fixed-income Sukuk issues focuses on timely payment. In the case of variable income financial instruments, we believe that the investment quality should take precedence over the likelihood of full and timely payment given the predominant equity characteristics of such instruments. MARC S GENERAL RATING GUIDELINES FOR SUKUK The analytical components in the rating of a Sukuk transaction are: 1) Analysis of the basic structure of the Sukuk MARC s evaluation of a Sukuk structure revolves around its structuring intent, i.e. whether an issue is structured as an assetbacked transaction (in which case it would reflect the performance of the securitised assets) or to achieve a flow-through of the rating of the originator/borrower or third-party obligor(s) or guarantor to the Sukuk. The structure of the Sukuk will have significant impact on the risk profile of the Sukuk and determines the rating methodology to be used (conventional corporate and project finance rating methodology or asset-backed methodology). 2) Assessment of key transaction parties - MARC considers the roles of key participants in the transaction: originator/borrower, lessee(s) or obligor(s), guarantor(s), contractor, servicer/back-up servicer as well as the credit quality of each participant and ability to perform their roles, and the corresponding implications of such for the risk profile of the Sukuk. A shadow rating may be performed on key participants where MARC believes their credit quality to be an important driver of the rating of the Sukuk issued. 3) Asset and cashflow analysis This analysis is the most important driver of the ratings assigned to asset-backed and non recourse or limited recourse project finance Sukuk. Some Sukuk are structured with external liquidity support and/or reserve accounts to mitigate interim deficiencies in returns from the assets. Alternatively, the deficiency may be Page 3 of 16

4 a direct and irrevocable obligation of the originator as Manager of the Sukuk, as in existing asset-based Sukuk transactions. The valuation of the asset(s) forms an important part of MARC s review where redemption of Sukuk is to be partially or wholly derived from refinancing or disposal of the asset(s) to third parties. 4) Assessment of credit enhancement and structural protections MARC assesses the internal credit enhancements such as reserve accounts, payment waterfalls and collateral value in addition to external credit support which may be provided by the originator/borrower or third party guarantor(s). 5) Legal analysis The perfection of legal interest in the underlying assets and the insulation of the assets from insolvency or reorganization of the originator/seller are important not only in the context of any securitisation but also from the perspective of any secured financing. The terms under which the Sukuk are issued may specify certain trigger events that, if they occur, would cause the transaction to be wound down. These could include failure of the lessee to make required lease payments under a Sukuk Al-Ijarah structure, and certain events of insolvency and default connected with the lessee. In Sukuk structures involving a SPV issuer, MARC will consider the bankruptcy remoteness of the SPV and the limitations on the business activities of the SPV. Syariah-compliance is fundamental to the issuance of Sukuk, and sets the issuance of Islamic capital market instruments apart from conventional debt instruments. Reflecting this view, the domestic regulatory framework for the issuance of Islamic securities in Malaysia requires the appointment of Syariah advisers to advise on all aspects of Islamic securities and to ensure compliance with applicable Syariah principles and relevant resolutions and rulings made by the Securities Commission s Syariah Advisory Council. MARC opines that Syariah compliance is generally adequately addressed by the appointed Syariah panel of the issuer s lead arranger(s) and financial advisors. SUKUK STRUCTURES RATED BY MARC MARC has rated a total of 47 issuances of RM-denominated Sukuk since 2001 with an aggregate value of RM11.57 billion as well as the ground-breaking USD368.0 Million Sukuk Al- Ijarah issuance by First Global Sukuk Inc in 2001 (under MARC International, a subsidiary of MARC). First Global Sukuk Inc was the first USD-denominated Sukuk issuance involving a corporate, Kumpulan Guthrie Berhad. The complete listing of Sukuk issues rated by MARC to date is provided in Appendix B. In this section of our methodology report, key highlights of Sukuk transactions we have rated are provided. I. Sukuk Al-Ijarah Structure MARC has rated a number of Sukuk Al-Ijarah structures, all of which have involved an issuer SPV, usually a wholly-owned subsidiary of the Seller of the assets. The SPV funds the purchase of the assets by issuing Sukuk which represents beneficial ownership in the assets. The assets are leased to entities affiliated to the Seller or to the Seller in exchange for periodic rental payments which are matched to the periodic distributions under the Sukuk. The Seller issues a Purchase Undertaking to repurchase the SPV s interest in the asset on maturity or any interim date at a pre-determined price. At maturity or on a dissolution event, the SPV sells the asset(s) back to the Seller and redeems the Sukuk. Page 4 of 16

5 a) Asset-based Sukuk Al-Ijarah Ingress Sukuk Berhad (Ingress Sukuk), a SPV issuer of RM160.0 million Sukuk Al-Ijarah Programme (current issue rating: A IS /MARCWatch Negative), is a wholly-owned subsidiary of Ingress Corporation Bhd (Ingress). Ingress Sukuk was incorporated as a SPV to facilitate the sale and leaseback of certain identified assets for the Sukuk Al-Ijarah issuance. The Sukukholders hold undivided proportionate beneficial ownership of the assets. Ingress is principally an investment holding company with subsidiaries primarily involved in automotive components manufacturing, with increasing exposure in power engineering and railway electrification and to a smaller extent, the oil and gas sector. A purchase and sale undertaking is exercisable by both Ingress and Ingress Sukuk for the redemption of the Sukuks at the maturity of the issuance or upon occurrence of a dissolution event or an event of default to repay any outstanding balance. The Sukuk Al-Ijarah was rated at the same level as the rating on the lessee. The rating is indistinguishable in terms of priority with conventional debt-based financing at Ingress level. Additionally, under the terms of the Sukuk issuance, certain financial covenants have to be complied with at group level (Ingress). Exhibit 1: Ingress Sukuk Berhad Transaction Structure Sukukholders Sukuk Proceeds Periodic and dissolution distribution amount INGRESS CORPORATION BERHAD [as Seller] Assets Net Proceeds INGRESS SUKUK BERHAD [Issuer] Leases back assets and sells on dissolution event Periodic lease payments and exercise price INGRESS CORPORATION BERHAD [as Lessee] Issuer will transfer assets to Obligor/Lessee in exchange for Exercise Price, the proceeds of which will be used for Sukuk redemption on occurrence of Dissolution Event, Event of Default or at maturity of the lease. Page 5 of 16

6 b) Asset-backed Sukuk Al-Ijarah A bankruptcy remote special purpose vehicle, ABS Logistics Berhad (ABS Logistics) issued Sukuk under a programme which consisted of RM100.0 million nominal value Class A, RM20.0 million nominal value Class B and RM40.0 million nominal value of Class C Senior Sukuk, RM44.5 million nominal value Class D Mezzanine Sukuk and RM95.5 million nominal value Class E Subordinated Sukuk. (The Class D and Class E Sukuk are unrated.) ABS Logistics acquired a portfolio of 23 warehouses from integrated logistics provider, Tiong Nam Logistics Holdings Berhad (Tiong Nam) and/or its subsidiaries for RM191.5 million. It then entered into an Ijarah (lease) agreement with Tiong Nam Logistics Solutions (TNLS) for a period of up to ten years. Periodic distributions and capital repayments on the Sukuk are funded by monthly Ijarah rentals made by the lessee during the tenure of the transaction as well as the proceeds from either the repurchase of the properties via a call option exercised by the lessee or sale of the properties to third parties prior to the final legal maturity. The call option s exercise price will be the higher of the market value of the properties and the aggregate amount required to redeem all the outstanding Senior Sukuk and any accrued profit. The securitised properties comprising of 23 industrial warehouses located in seven states, had an estimated occupancy rate of 82.7% at the time of MARC s September 2008 review. The portfolio is exposed to moderate concentration risk with its top ten tenants contributing 32.0% of its total rental revenue. The Ijarah rentals are, however, fixed for the purposes of the transaction irrespective of the actual rental collections at TNLS which would be a function of rental rates in the warehouse market as well as actual occupancy rates at the 23 warehouses. The approach taken to rate ABS Logistics Class A, Class B Senior Sukuk was firstly to estimate the net cash flow (NCF) that could be generated by the securitised properties on a sustainable basis, looking through property market cycles. Once the sustainable cashflow was determined, MARC applied a capitalization rate of 10% to arrive at the DCF valuation of the property. The DCF valuation was then used to size the Class A and Class B Senior Sukuk tranches, based on applicable loan-to-value (LTV) limits for the target rating levels of AAA IS and AA IS respectively. The decision to apply asset-backed methodology was predicated on elements of securitisation being present in the transaction, including the true-sale of the warehouses and the option to sell the properties to third parties. The rating of the Class C Senior Sukuk, meanwhile, reflects an unconditional and irrevocable guarantee provided by Malayan Banking Berhad. The amortising structure of the Sukuk significantly reduces refinancing risk with projected LTVs for Class A and B Senior Sukuk Ijarah reducing to 25.3% and 37.9% respectively at maturity. Of the RM100.0 million of Class A Senior Sukuk, RM60.0 million is expected to be paid down prior to its final legal maturity. Including the projected reserve account balance of RM3.55 million and collection account balance of RM11.3 million at the end of year 10, the net Page 6 of 16

7 amount of Class A and Class B exposed to refinancing risk prior to their respective final legal maturity will be a modest RM45.2 million. MARC also carried out a shadow rating on Tiong Nam consistent with our guidelines for property-backed transactions in which there is a single seller/lessee or the lessees are affiliated to the seller. MARC requires the lessee to be rated at least A- for any structure that has AAA tranche(s). Exhibit 2: ABS Logistics Berhad Transaction Structure Senior Sukukholders Mezzanine Sukukholders Subordinated Sukukholders Sukuk Proceeds Periodic distributions Tiong Nam Logistics Berhad and subsidiaries [Sellers] Warehouses ABS LOGISTICS BERHAD [SPV Issuer] Leases assets Tiong Nam Logistics Solutions [Lessee] Net Proceeds Monthly Ijarah rentals Call option to purchase assets II. Sukuk Al-Musyarakah Structures MARC has also rated a number of Sukuk-Musyarakah transactions, the majority of which have involved SPV issuers. In Malaysia, the application of the Musyarakah structure can be found in a wide range of Sukuk transactions including receivablesbacked issuances, project financing and contract financing. The typical transaction configuration of Sukuk Musyarakah in our rating universe is as follows: Investors enter into one or a series of Musyarakah ventures (partnership agreements) between themselves to finance the Musyarakah venture. The Musyarakah venture could take the form of undertaking a construction contract or supplying contracted equipment and services in return for deferred payments or financing the construction of assets in return for a fixed stream of lease payments or deferred payments. The Musyarakah appoints the issuer to carry out the venture in an agent s capacity and to receive the capital contribution in Musyarakah. The issuer issues Sukuk Musyarakah in return for the capital contributions. The issuer could be a SPV or the corporate itself. Where the issuer is a SPV and the transaction involves the financing the construction of assets, there could be a back-to-back arrangement with a corporate related to the SPV to construct the asset. Upon completion of construction, which would be funded from Page 7 of 16

8 the Sukuk issuance proceeds, the assets will be leased to the corporate with the lease payments sized to cover the return on the Sukuk and principal repayment of the Sukuk on the scheduled dissolution date of the respective Musyarakah ventures. The corporate also irrevocably undertakes to purchase the Sukuk upon occurrence of a scheduled dissolution or dissolution event. MARC has also rated a transaction in which the completed asset would be sold to the corporate in exchange for deferred payments. a) Sukuk Musyarakah without Purchase Undertaking Matang Highway Sdn Bhd (Matang), a wholly-owned subsidiary of Zecon Berhad (Zecon), was established with a single purpose to undertake the issuance of RM70.0 million Sukuk Musyarakah (rated AA- IS /Stable). The proceeds from the Sukuk were used to refinance Zecon s existing debts and to finance working capital requirements for the turnkey contract awarded by Jabatan Kerja Raya Sarawak (JKR Sarawak) to Zecon for the design and construction of a highway linking Kuching City to the State of Sarawak s proposed new Federal Administrative Centre (FAC) (Matang Route Project). Matang and Zecon entered a Mudarabah arrangement under which Matang acts as capital provider for the turnkey contract and Zecon, as the entrepreneur. Sukukholders invest in trust assets comprising Matang s rights, entitlements, benefits and interest under the turnkey contract, the designated accounts under the proposed issue structure and other permitted investments. Cashflows generated from construction under the turnkey contract funds profit payments and capital repayments under the fully amortising three-year Sukuk. The rating and rating outlook on the Sukuk Musyarakah are based on the credit quality of the sole obligor, JKR Sarawak, and the continuing performance of Zecon under the turnkey contract. MARC s assessment of obligor credit quality took into consideration the prompt payment record of JKR Sarawak under the turnkey contract and the implicit government support for the Federal Government-approved project. Consideration was given to protective covenants under the proposed issue structure and the designated accounts capture construction receipts in respect of the turnkey contract. Unlike other earlier Sukuk Musyarakah structures rated by MARC, this financing structure is essentially non-recourse to the originator of the trust assets. This, as well as the moderate credit standing of its originator/shareholder, Zecon, which is also the contractor for the Matang Route Project were moderating factors for the rating. Additionally, the Musyarakah venture bears the risk of construction cost overruns which MARC believes to be satisfactorily addressed by the margin of safety built into the contract price. The project scope has undergone some revision from the time it was originally awarded in July In August 2007, project was revised to comprise two phases, OMR and the Revised Matang Route (RMR). The first phase, OMR, is 1 18-km stretch which carries a fixed contract price of RM million while RMR, the second phase, is a 13.4-km stretch with a fixed contract price of RM million. Construction progress on the highway as at the time of our initial rating was assessed to be supportive of the overall construction schedule of the project and the scheduled completion dates of December 2008 for the OMR and March 2011 for the RMR. Page 8 of 16

9 Exhibit 3 : Matang Highway Transaction Structure Musyarakah Venture Mudarabah Venture Trustee Assignment of contractual rights to SPV Sukuk Investors Issues Sukuk Musyarakah Sukuk Proceeds Agent Matang SPV Issuer [Rabb al-mal] Finances project Zecon [Mudarib] Performance of project Project Profit payment and capital repayment Remittance of construction receipts JKR Sarawak [Obligor] Designated Accounts b) Receivables-backed Sukuk Musyarakah Musyarakah One Capital Berhad s (Musyarakah One) RM2.5 billion Sukuk Musyarakah Programme provides an example of a receivables-backed sukuk issuance rated on the basis of the credit quality of the sole obligor, the Government of Malaysia (GOM). The receivables backing the sukuk constitute irrevocable and unconditional obligations of the GOM. Musyarakah One is a special purpose vehicle incorporated for the purpose of issuing sukuk musyarakah to finance the acquisition of receivables from TIME Systems Integrators Sdn. Bhd. (TSI). Under the RM2,500 million Sukuk Musyarakah Programme (the Programme), government receivables generated from TSI s supply contracts may be sold to Musyarakah One via an absolute legal assignment, on a periodic basis. Investors in the Sukuk Musyarakah are beneficial owners of the receivables. The receivables comprise the rights, title, interests and benefits to the GOM s payment obligations to TSI, pursuant to the contract and letter(s) of award to supply teaching equipment and for the provision of related services to various schools and certain government areas (if any), from time to time, in implementing a programme for teaching Science and Mathematics in English. Subsequent to each delivery of equipment and/or services, the GOM issues a Sijil Utama, which stipulates the contract sum payable by the GOM as well as the repayment schedule in respect of the contract sum, which will be on a deferred payment basis. The Sijil Utama represents the GOM s irrevocable and unconditional obligation to pay the agreed contract sum in accordance with the Page 9 of 16

10 stipulated schedule without any right of set-off or provision for acceleration in the event of default under the Programme. Sukukholders are not exposed to performance risk as receivables are securitized subsequent to delivery, installation, testing and commissioning of teaching equipment. In addition, the GOM does not have the right to set-off any claims against the securitized receivables. The payment profile for the Sukuk mirrors the payments from the GOM under the Sijil Utama. Exhibit 4 : Musyarakah One Transaction Structure Government of Malaysia [Obligor] Supply of teaching equipment and services Time Systems Integrators [Originator] Sale of Deferred Receivables Proceeds Direct payment to designated account Musyarakah One [SPV Issuer] Holds Security on behalf of Sukuk Musyarakah holders Profit and Capital Repayment Issues Sukuk Musyarakah Sukukholders Provision and repayment of bridging loan Bridging Lenders c) Sub-lease backed Sukuk Musyarakah Under the Putrajaya Holdings Sdn Bhd's (PjH) up to RM1.5 billion Nominal Value Sukuk Musyarakah Medium Term Notes Programme (rated AAA IS /Stable), a Musyarakah Venture was formed to invest in the trust asset comprising PjH's rights, entitlements and benefits under a sub-lease agreement with the Government of Malaysia (GOM) in relation to 15 blocks of fully completed government buildings referred to as Parcel E. PjH is the concessionaire and developer of Putrajaya, Malaysia's Federal Administrative Capital. Under a concession agreement and supplemental concession agreement with the GOM, PjH has a contractual obligation to construct government buildings in return for a 25-year lease of the buildings and land. The buildings and land are sub-leased to the GOM upon completion for a corresponding 25-year period for specified rental income streams with provisions for upward revision of rental. Maintenance of the buildings will be undertaken and borne entirely by the GOM. PjH holds the trust asset on trust absolutely for itself and consequently for the Sukukholders. The latter are entitled to one off distributions and/or periodic Page 10 of 16

11 distributions from the sub lease payments from the GOM based on a preagreed ratio. Should the sub-lease payments from the GOM fall short of the expected return, PjH has to cover shortfalls. The Sukukholders shall pay any return above the expected return to PjH, the appointed manager of the Musyarakah Venture, as incentive fee. PjH also provides a purchase undertaking to purchase the sukuk from the trustee upon occurrence of a scheduled dissolution or dissolution event. MARC assigned a AAA IS rating to the Sukuk issuance on the basis of the contractual lease rentals payable by the GOM (rated AAA) in respect of Parcel E, and PjH's senior unsecured debt rating of AAA. The latter s rating was underpinned by PjH's strong earnings and cash flow generating ability as well as superior financial flexibility derived from its majority ownership by Petroliam Nasional Berhad (Petronas) through KLCC (Holdings) Sdn Bhd and Khazanah Nasional Berhad, considerable unutilized standby credit lines and healthy cash and bank balances. Exhibit 5 : Putrajaya Holdings Transaction Structure Investor Investor Investor Musyarakah Venture between the Investors Periodic distributions and capital repayment Income from the Venture Musyarakah capital Sukuk Issue Proceeds Putrajaya Holdings Sdn Bhd [Issuer] The Venture [Investment in Trust Asset] Sub-lease of buildings Sub-lease rentals Shortfall in expected return on Sukuk Trustee Government of Malaysia [Obligor/Sublessee] Purchase Undertaking Page 11 of 16

12 CONCLUSION Conceptually, Sukuk are investment instruments which are intended to promote risk and reward sharing in the performance of the underlying asset(s), project or venture into which Sukukholders have invested. Earlier forms of Sukuk behaved more or less like conventional fixed income instruments reflecting investors' modest risk appetite during the developmental stages of Islamic finance. With the growing maturity of the Islamic finance sector, greater acceptance of the true spirit of Islamic finance and the momentum created by AAOIFI's Pronouncement, MARC is confident that future Sukuk issuances will promote more equitable sharing of risk between the Sukuk investors and the borrower. We expect the elimination of purchase undertakings by the originator/promoter in the transaction structure in the Mudharabah and Musyarakah-based Sukuk issuances post-aaoifi pronouncement will spur the need for rating opinions on investment quality as opposed to default risk. It is expected that the performance of such issuances will depend less on the creditworthiness of the originator/underlying borrower and more on the performance of the assets or project as in the case of asset-backed securities or non-recourse project financing. Depending on the cashflow characteristics of the asset, the Sukuk may have to be structured as a variable-income instrument with the flexibility to defer returns and absorb losses as dictated by the performance of the asset(s) or project. The predominant equity characteristics of such instruments will create the need for rating opinions on overall investment quality, focusing on the degree of security of principal and predictability of financial returns as opposed to the likelihood of timely and full payment. Back in 2001 and following consultation with our Syariah Advisory Panel, MARC introduced a rating product based on investment quality in anticipation for the emergence of variable-income risk participating Islamic financial instruments. Page 12 of 16

13 APPENDIX A SUKUK RATING SCALE RATING SYMBOLS & DEFINITIONS ISLAMIC CAPITAL MARKET INSTRUMENT RATINGS - ISLAMIC SUKUK (ASSET-BASED INSTRUMENTS) LONG-TERM RATINGS MARC s Long-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with maturities of more than one year. These ratings specifically assess the likelihood of timely payment of the instrument issued under the various Islamic asset-based financing contract(s). Investment Grade AAA IS Extremely strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). AA IS A IS Very strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Risk is slight with degree of certainty for timely payment marginally lower than for instruments accorded the highest rating. Strong ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). However, risks are greater in periods of business and economic stress than for instruments with higher ratings. BBB IS Adequate ability to make payment on the instrument issued under the Islamic asset-based financing contract(s). Vulnerable to moderately adverse developments, both internal and external. Non-Investment Grade BB IS Uncertainties exist that could affect the ability to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). B IS C IS Significant uncertainty exists as to timely payment on the instrument issued under the Islamic asset-based financing contract(s). Slight adverse developments could impair ability to make timely payment. Possesses a substantial risk of default, with little capacity to address further negative changes in financial circumstances. D IS contract(s). Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing Notes : Long-Term Ratings from AA to B may be modified by the addition of a plus (+) or minus (-) suffix to show relative standing within the major rating categories. Bank-guaranteed issues will carry a suffix (bg), corporate-guaranteed a suffix (cg) and for all other supports a suffix (s) when such guarantees or supports give favourable effect to the assigned rating. SHORT- TERM RATINGS MARC s Short-Term Ratings are assigned to non-ringgit denominated Sukuk issuances with original maturities of one year or less, and are intended to assess the likelihood of timely payment of the instrument issued under the various Islamic asset-based financing contract(s). Investment Grade MARC-1 IS Extremely strong capacity to make timely payment on the instrument issued under the Islamic assetbased financing contract(s). MARC-2 IS MARC-3 IS Strong capacity to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). Timeliness of payment is slightly susceptible to adverse changes in operating circumstances and economic conditions. Adequate capacity to make timely payment on the instrument issued under the Islamic asset-based financing contract(s). Moderately adverse changes in operating environment and economic conditions may weaken financial capacity to make timely payment. Non-Investment Grade MARC-4 IS Vulnerable to non-payment of instrument issued under the Islamic asset-based financing contract(s). Capacity to make payment on the instrument is dependent upon favourable business, financial and economic conditions. D IS Failed to make scheduled payment on the instrument issued under the Islamic asset-based financing contract(s). Notes : Short-Term Ratings will also carry a suffix (bg) for bank-guaranteed issues, (cg) for corporate guaranteed issues and an (s) for all other supports when such guarantees or supports give favourable effect to the assigned rating Subscript IS for Long-Term and Short-Term Ratings denotes an Islamic Sukuk (Asset-based Instruments). The rating symbols and definitions above have been approved by the Shariah Council of MARC Page 13 of 16

14 APPENDIX B LIST OF SUKUK RATINGS BY MARC Issuer / Issue Description Announced Long-Term (Initial Rating) Issue Size RM/million FIRST GLOBAL SUKUK INC. Dec-01 A- IS USD368.0 mil Sector: Property/Plantation Instrument: 3 & 5 Years Serial Islamic Lease Sukuk Issuance INGRESS SUKUK BHD Jun-04 A+ IS Sector: Industrial Products - Automotive Instrument: 5-7 Years Sukuk Al Ijara Issuance Programme AMPLE ZONE BHD Feb-05 AAA IS 50.0 Sector: Property Instrument: 7 Years Sukuk Al-Ijarah AMPLE ZONE BHD Feb-05 AA IS 13.3 Sector: Property Instrument: 7 Years Sukuk Al-Ijarah AMPLE ZONE BHD Feb-05 A IS 75.0 Sector: Property Instrument: 7 Years Sukuk Al-Ijarah MUSYARAKAH ONE CAPITAL BHD Apr-05 AAA IS Sector: Technology Instrument: 5 Years Sukuk Musyarakah CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 3 Years Asset-Backed Sukuk Musyarakah Issuance CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 5 Years Asset-Backed Sukuk Musyarakah Issuance CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 7 Years Asset-Backed Sukuk Musyarakah Issuance CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 10 Years Asset-Backed Sukuk Musyarakah Issuance CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 12 Years Asset-Backed Sukuk Musyarakah Issuance CAGAMAS MBS BHD [2005-1] Jul-05 AAA IS Instrument: 15 Years Asset-Backed Sukuk Musyarakah Issuance ASSAR CHEMICALS SDN BHD Aug-05 AAA IS Sector: Infrastructure & Utilities - Oil & Gas Instrument: 3-10 Years Serial Sukuk Musyarakah IJN CAPITAL SDN BHD Aug-05 AAA IS Sector: Trading/Services - Healthcare Instrument: 7 Years Sukuk Musyarakah IJN CAPITAL SDN BHD Aug-05 AA+ IS Sector: Trading/Services - Healthcare Instrument: 7 Years and below Sukuk Musyarakah MUSYARAKAH ONE CAPITAL BHD Aug-05 AAA IS Sector: Technology Instrument: 2 Years Sukuk Musyarakah KONSORTIUM LEBUHRAYA UTARA-TIMUR (KL) SDN BHD Oct-05 A+ IS Sector: Infrastructure & Utilities - Toll Road Instrument: 13 Years Redeemable Secured Serial Bonds under an Islamic Istisna Sukuk Page 14 of 16

15 Issuer / Issue Description Announced Long-Term (Initial Rating) Issue Size RM/million SACOFA SDN BHD Nov-05 AAA IS Sector: Technology Instrument: 4-9 Years Sukuk Istisna' SARAWAK GATEWAY SDN BHD Nov-05 AAA IS Sector: Technology Instrument: 10 Years Sukuk Ijarah VASTALUX CAPITAL SDN BHD Dec-05 AA- IS Sector: Trading/Services - Oil & Gas Instrument: 5 Years Sukuk Musyarakah KWANTAS SPV SDN BHD May-06 AAA IS 80.0 Sector: Plantation Instrument: 9 Years Sukuk Ijarah KWANTAS SPV SDN BHD May-06 AA IS 15.0 Sector: Plantation Instrument: 9 Years Sukuk Ijarah KWANTAS SPV SDN BHD May-06 A+ IS 60.0 Sector: Plantation Instrument: 9 Years Sukuk Ijarah DURA PALMS SDN BHD Jun-06 AAA IS Sector: Plantation Instrument: 8.5 Years Sukuk Al-Ijarah DURA PALMS SDN BHD Jun-06 AA IS 90.0 Sector: Plantation Instrument: 8.5 Years Sukuk Al-Ijarah DURA PALMS SDN BHD Jun-06 A IS 10.0 Sector: Plantation Instrument: 8.5 Years Sukuk Al-Ijarah DIVERSIFIED VENUE SDN BHD Aug-06 AA IS Sector: Property Instrument: 13 Years Sukuk Al-Ijarah Master Programme ABS LOGISTICS BHD May-07 AAA IS Sector: Property Instrument: 1-10 Years Senior Sukuk Ijarah ABS LOGISTICS BHD May-07 AA IS 20.0 Sector: Property Instrument: 10 Years Senior Sukuk Ijarah ABS LOGISTICS BHD May-07 AAA IS(bg) 40.0 Sector: Property Instrument: 5 Years Senior Sukuk Ijarah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 3 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 5 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 7 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 10 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 12 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 15 Years Sukuk Musyarakah CAGAMAS MBS BHD [2007-1] May-07 AAA IS Instrument: 20 Years Sukuk Musyarakah Page 15 of 16

16 Issuer / Issue Description Announced Long-Term (Initial Rating) Issue Size RM/million ALAM MARITIM RESOURCES BHD Jul-07 AA- IS Sector: Infrastructure & Utilities - Oil & Gas Instrument: 15 Years Sukuk Ijarah Medium Term Notes Facility DRIR MANAGEMENT SDN BHD Dec-07 AA IS Sector: Trading/Services - Transportation Instrument: 3 Years 6 months Sukuk Ijarah Medium Term Notes Programme DRIR MANAGEMENT SDN BHD Dec-07 AA- IS Sector: Trading/Services - Transportation Instrument: 5 Years Sukuk Ijarah Medium Term Notes Programme TRADEWINDS PLANTATION CAPITAL SDN BHD Dec-07 AAA IS Sector: Plantation Instrument: 6-10 Years Sukuk Ijarah MNRB HOLDINGS BERHAD Dec-07 AA IS Sector: Insurance Company Instrument: 5 years Islamic Medium Term Notes Issuance Programme TRADEWINDS PLANTATION CAPITAL SDN BHD Dec-07 AA+ IS 30.0 Sector: Plantation Instrument: 4-7 Years Sukuk Ijarah WESTPORTS MALAYSIA SDN BHD Feb-08 AA+ IS Sector: Infrastructure & Utilities - Port/Airport Instrument: 15 years Sukuk Musyarakah Medium Term Notes STRATAVEST SDN BHD Mar-08 AA- IS Sector: Infrastructure & Utilities - Power Category: Corporate Debt Instrument: 10.5 Years Sukuk Ijarah WCT ENGINEERING BHD Mar-08 AA- IS Sector: Construction Instrument: 5 years Redeemable Sukuk with Warrants PUTRAJAYA HOLDINGS SDN BHD May-08 AAA IS 1,500.0 Sector: Property Instrument: 24 Years Nominal Value Sukuk Musyarakah Medium Term Notes Programme TANJUNG LANGSAT PORT SDN BHD May-08 AA- IS Sector: Infrastructure & Utilities - Port/Airport Instrument: 12 Years Sukuk Musyarakah MATANG HIGHWAY SDN BHD May-08 AA- IS 70.0 Sector: Construction Instrument: 3 Years Sukuk Musyarakah 2008 Malaysian Rating Corporation Berhad Page 16 of 16