RAM Ratings reaffirms P1(s) rating of Sunway REIT’s debt facility, issued by financing conduit

Published on 21 June 2013

RAM Ratings has reaffirmed the short-term enhanced rating of SunREIT Capital Berhad’s (“SunREIT” or “the Issuer”) Up To RM1.6 billion Nominal Value Commercial Papers Programme (“CP Programme”) at P1(s). The suffix “s” denotes the rating enhancement accredited after due consideration of the collateral for the CP Programme, as well as the full underwriting commitment from Public Bank Berhad (“Public Bank”). The rating is notched up from the credit profile of Sunway Real Estate Investment Trust (“Sunway REIT”).

SunREIT is a special-purpose vehicle set up by Sunway REIT as a funding conduit to undertake a fund-raising exercise on a secured basis.

Listed on the Main Market of Bursa Malaysia, Sunway REIT is currently the second largest Malaysian REIT in terms of assets (RM5.0 billion as of March 2013). Its earnings and cash flow are expected to remain solid in the near term, underpinned by its key assets’ track record of resilient performance, a minimum guaranteed rent from its hospitality assets and the triple net lease from its recent acquisition of Sunway Medical Centre (“SMC”). Moreover, Sunway REIT’s close relationship with its active Sponsor, Sunway Berhad – an established developer, owner and manager in various commercial property sub-segments – yields a pipeline of injectable assets.

That said, Sunway REIT’s financial performance is substantially dependent on the performance of Sunway Pyramid (which accounted for 55% of its net property income in 9ME March 2013). Nonetheless, we view the downside risk as limited, owing to Sunway Pyramid’s stellar operating track record as an established suburban mall. Further upside potential from the mall’s strong rental renewal rate with attractive reversion rates during its upcoming major tenancy renewal cycle in FY June 2014 will buffer loss in earnings during the refurbishment of Sunway Putra Place. Meanwhile, Sunway REIT’s ambitious goal of enlarging its asset base over the next 2-4 years, from RM3.7 billion at its initial public offering to RM7 billion (to be equally funded by debt and equity), will add pressure to its balance sheet. Its gearing ratio and leverage ratio (debt–to–asset) are expected to come up to about 0.7 times and 38%, respectively during this period. Nonetheless, its current portfolio line-up will underpin the REIT’s financial performance over the near-term. Based on our sensitivity analysis, its average gearing and funds from operations debt coverage over the next 2 years – approximately 0.61 times and 0.14 times respectively – remain adequate. Sunway REIT is further exposed to the vagaries of the retail, hospitality and office sectors.

The enhanced rating of the CP Programme is premised on RAM’s methodology on well-secured debt. We highlight that the P1(s) enhanced rating does not solely reflect the probability of Sunway REIT defaulting on its financial obligations, but also takes into consideration the strong likelihood of recovery of principal through crystallisation of the CP Programme’s securities within a reasonable period after default, as well as the full underwriting commitment from Public Bank. While Public Bank is currently the sole underwriter of the transaction, it reserves the right to sell down all or part of its underwriting commitment. In such an instance, the new underwriter will honour the terms and conditions of Public Bank’s commitment. Excluding its Penang properties and SMC, Sunway REIT’s remaining portfolio – valued at RM4.3 billion – has been pledged as security for the CP Programme. Based on this latest valuation, the CP holders will have an asset-to-debt cover of 2.89 times – well above the minimum security cover of 1.67 times.

Media contact

Yong Keck Phin

(603) 7628 1183

keckphin@ram.com.my