RAM Ratings reaffirms AAA rating of Ara Bintang's First Senior MTNs

Published on 13 September 2011
RAM Ratings has reaffirmed the AAA rating of Ara Bintang Berhad’s (Ara Bintang) RM330 million First Senior Medium-Term Notes (First Senior MTNs); the long-term rating has a stable outlook. Ara Bintang is a special-purpose vehicle incorporated for the securitisation exercise involving 2 retail malls, namely Starhill Gallery (Starhill) and Lot 10 Shopping Centre (Lot 10) - collectively known as the Properties - with a market value of RM1.042 billion as at 31 December 2010.

The reaffirmation is premised on the credit support provided by the loan-to-value (LTV) ratio of 44.3% and debt service coverage ratio (DSCR) of 2.00 times, based on
RAM Ratings’ adjusted valuation of RM745.41 million in aggregate for Starhill and Lot 10. The LTV ratio and DSCR remain commensurate with our AAA rating. The rating is further underscored by the Properties’ above-average quality, backed by their strategic location in the heart of Kuala Lumpur, i.e. Bukit Bintang, as well as the transaction’s structural features. Such features include mechanisms to initiate the sale of the Properties upon the occurrence of trigger events and the availability of cash reserves in the designated accounts to address liquidity risk.

The transaction’s strengths are, however, moderated by the high level of tenant-concentration risk for the Properties as YTL Corporation Berhad (the sponsor of the transaction) takes up a significant portion of their net lettable area (NLA). We further highlight the risk of potential delay in the sale of the Properties due to provisions in the transaction documents, which allow the Master Tenant or the Call Option holder to lodge a private caveat against the titles to the Properties under specific scenarios.

During the 12-month period ended 30 June 2011, Starhill had undergone a RM25 million refurbishment-and-asset-enhancement exercise. Due to the refurbishment, Starhill had experienced disruptions to its business. The negative impact from this, coupled with greater-than-expected competitive pressure, had contributed to Starhill’s underperformance; its average occupancy rate and average rental rate had declined a respective 2.0% and 7.2% over the same period. Meanwhile, Lot 10’s performance was within our expectations.

Collectively, the Properties rang up RM55.5 million of net property income (NPI) for the 12-month period, falling short of RAM Ratings’ assumptions on sustainable cashflow. Nonetheless, the Properties’ adjusted valuation remains unchanged, underpinned by their above-average asset quality and ongoing efforts to rejuvenate them, particularly Starhill. Furthermore, the additional NPI contribution from the 8,100 square feet of NLA arising from Starhill’s refurbishment has yet to be accounted for in our sustainable cashflow. The stable outlook reflects our view that the performance of the Properties will continue to support their adjusted valuations, despite a more subdued performance in recent months. Should their performance fail to recover in the medium term, however, we may revise the rating outlook to negative, with our assumptions changed accordingly.

Media contact
Ang Swee Ee
(603) 7628 1113
sweeee@ram.com.my