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

Published on 14 January 2013

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. The stable outlook reflects our view that the performance of the underlying assets, comprising Starhill Gallery (“Starhill”) and Lot 10 Shopping Centre (“Lot 10”) – collectively, “the Properties”  – will normalise in the near term and converge to correspond with their adjusted aggregate valuation of RM745.41 million. This will, in turn, support a loan-to-value ratio of 44.3% and a debt service coverage ratio of 2.00 times. Ara Bintang is a special-purpose vehicle incorporated for the securitisation exercise involving Starhill and Lot 10, which had a combined market value of RM1.08 billion as at 31 December 2011.
Despite a 5.8% year-on-year (“y-o-y”) growth in the Properties’ annualised net property income (“NPI”) to RM59.8 million, the portfolio’s performance during the reviewed period fell short of our expectations by RM6.1 million due to disruption of shopper traffic caused by asset-refurbishment/tenant-restructuring exercises. Based on the first 9 months of FYE 31 December 2012 (“FY Dec 2012”), Starhill’s annualised NPI remained below our sustainable-cashflow assumption – albeit with some y-o-y improvement. Lot 10’s average occupancy rate (“AOR”) and average rental rate (“ARR”) had been affected by the restructuring of tenanted space to accommodate a new tenant (retail giant H&M), thereby weakening its performance in 2012; concurrently, Starhill also underwent a tenant-restructuring programme, i.e. signed on new tenants and relocated existing ones while retiring weaker tenants. We expect the performance of the Properties to normalise upon the finalisation of the asset-refurbishment/tenant-restructuring exercises by 2Q 2013.
The rating reaffirmation 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 weak debtors’ ageing profile of the Properties and their high level of tenant-concentration risk as YTL Corporation Berhad (the sponsor of the transaction) takes up a significant portion of their net lettable area. As at end-June 2012, significant portions of the receivables of Starhill (63%) and Lot 10 (57%) were in the “more than 90 days” ageing bucket. We note that legal action has been initiated on approximately 58% of the non-current debtors to recover the amounts owed. While the actual sums are relatively small (Starhill: 5.52% of annualised revenue in FY Dec 2012; Lot 10: 4.52%), we are cautious about the ability of the Properties to translate their NPI into operating cashflow. Notably, this ageing profile is significantly weaker than those of some of the rated malls in RAM Ratings’ portfolio. In conclusion, we expect the NPI performance of Starhill and Lot 10 to gradually converge towards our sustainable-cashflow assumptions in the near future – underpinned by the completion of asset refurbishments, the signing on of new tenants and improved rental collection rate/debtors’ ageing profile – failing which we may revise the rating outlook.
We further highlight the risk of a 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. This is, however, moderated by our view that as both parties are related to the sponsor, they will not unnecessarily withhold the withdrawal of the private caveat (if lodged) to the detriment of the transaction.
Media contact
Yong Keck Phin
(603) 7628 1183
keckphin@ram.com.my