MARC AFFIRMS ITS AAA and B- RATINGS ON SPECIAL CORAL SDN BHD’S SENIOR CLASS A AND SUBORDINATED MTNs RESPECTIVELY; UPGRADES RATINGS ON ITS SENIOR CLASS B THROUGH SENIOR CLASS F MTNs

Mar 21, 2014 -

MARC has affirmed its AAA and B- ratings on special purpose vehicle Special Coral Sdn Bhd’s (Special Coral) Senior Class A and Subordinated Class Medium Term Notes (MTNs) respectively. Concurrently, MARC has upgraded its ratings on Senior Class B through Senior Class F MTNs. The rating actions on Special Coral’s RM1.1 billion MTN Programme are summarised as follows:

		Tranche size	Issued amount	Previous ratings	Rating action	Current   ratings
Senior Class MTNs
1.	Class A	RM160 million	RM160 million	AAA	Affirmed	AAA
2.	Class B	RM40 million	RM40 million	AA	Upgraded	AA+
3.	Class C	RM35 million	-	A	Upgraded	AA-
4.	Class D	RM25 million	-	BBB	Upgraded	A-
5.	Class E	RM10 million	-	BB	Upgraded	BBB-
6.	Class F	RM30 million	-	B	Upgraded	BB-
Subordinated Class MTNs		RM800 million	RM460 million	B-	Affirmed	B-
Total		RM1.1 billion	RM660 million

The outlook on all the ratings is stable. The total outstanding MTNs have remained at RM660.0 million which comprises RM160.0 million, RM40.0 million and RM460.0 million of Senior Class A, Senior Class B and Subordinated Class MTNs respectively. Proceeds from the issuance of the MTNs had been largely used to acquire the eight-storey Queensbay Mall in Bayan Lepas, Penang for RM650.0 million. The acquisition consisted of a gross retail area of approximately 913,834 square feet (sq ft), accounting for approximately 90.5% of Queensbay Mall’s entire gross retail area. Special Coral may issue the remaining availability of the MTN Programme to finance future capital expenditure and working capital.

MARC notes that the noteholders are exposed to refinancing risk given the non-amortising structure of Senior MTNs. The refinancing risk is mitigated by the two call options exercisable by CapitaMalls Asia Limited (CMA), the parent company of the transaction’s servicer CapitaLand Retail Malaysia Sdn Bhd. The call options allow CMA to purchase the outstanding Senior MTNs or the mall, the proceeds of which will then be used to redeem the Senior MTNs. However, in the event the call options are not exercised, refinancing risk is further mitigated by the 18-month tail period between the expected and legal maturity as well as the trustee’s power of attorney to dispose the securitised assets. Meanwhile, the semi-annual interest payment obligations on the outstanding MTNs are met by rental income from the leasing of the shopping mall’s 879,961 sq ft net lettable area. The initial issuance of the Senior MTNs, with an expected maturity date in April 2014, is expected to be refinanced with a subsequent issuance under the MTN programme.

The ratings on the Senior MTNs are premised on the operational performance of Queensbay Mall, which has given rise to healthy loan-to-value (LTV) and debt service coverage ratios (DSCR). In 2013, Special Coral posted an 18.2% increase in net operating income (NOI) from RM46.9 million to RM55.4 million which is mainly attributed to improved average rental rate and growth in tenants’ sales. As at December 31, 2013, the mall’s average rental rate stood at RM7.06/sq ft (2012: RM5.98/sq ft) while the occupancy rate increased to 94.4% from 91.2% in the previous year. In line with the improved performance, MARC’s valuation of the mall is estimated at RM460.0 million using the revised NOI of RM41.4 million (2013: RM36.0 million) and a capitalisation rate of 9.0%. Following the revaluation, the respective LTV ratios of the Class A through Class F notes improved to 34.8% (2013: 40.1%), 43.5% (2013: 50.1%), 51.1% (2013: 58.9%), 56.5% (2013: 65.2%), 58.7% (2013: 67.7%) and 65.2% (2013: 75.2%) respectively. The ratings upgrade on the Senior Class B through Senior Class F MTNs is in accordance with the rating agency’s LTV parameters.

MARC views that Special Coral’s strong DSCRs on the outstanding Senior Class A and Senior Class B MTNs at 7.9 times and 6.2 times respectively to be commensurate with the current ratings. However, downward rating pressure could emerge if the mall’s actual performance deviates unfavourably from MARC’s assumptions. With respect to lease renewals, MARC notes that the lease renewal risk is mitigated by low tenant concentration with each tenant contributing less than 2.0% of gross rental revenue in 2013, with the exception of anchor tenant AEON Co. (M) Berhad (AEON).

The ratings are further supported by an undertaking by CMA to cover any shortfalls in the funding of semi-annual coupon payments on the MTNs. In 2013, CMA demonstrated improvement in its credit profile as indicated by decreases in negative free cash and debt-to-equity. Notwithstanding CMA’s recorded negative free cash flow over the last three years, MARC draws comfort from CMA’s diversified funding sources, well spread out debt maturity profile and meaningful financial flexibility as a majority-owned (65.3%) subsidiary of Singapore’s leading real estate developer, CapitaLand Limited.

The rating of the subordinated notes continues to reflect its subordinated priority in payment and higher risk of non-payment under stressed conditions relative to the senior notes. The stable ratings outlook is premised on MARC’s expectations that the operational and financial performance of Queensbay Mall would remain supportive of the ratings.

Contacts:
Ng Chun Kean, +603-2082 2230/ chunkean@marc.com.my;
David Lee, +603-2082 2255/ david@marc.com.my