RAM Ratings reaffirms ratings of debt facilities issued by Boustead-sponsored vehicle

Published on 17 October 2014

RAM Ratings has reaffirmed the following ratings of Mecuro Properties Sdn Bhd’s (Mecuro) RM900 million Nominal Value Bonds.

RM900 million Nominal Value Bonds	Rating/Outlook	Issue Amount
Senior Class A1 and A2	AAA/Stable	RM245 million
Senior Class B	AA2/Stable	RM12 million
Senior Class C	A1/Stable	RM15 million
Guaranteed Class D1	AA2(bg)/RW_Positive	RM209 million
Guaranteed Class D2	AAA(fg)/Stable	RM209 million
Guaranteed Class E	AAA(fg)/Stable	RM210 million
TOTAL		RM900 million

Mecuro is a special-purpose vehicle incorporated to facilitate a sale-and-leaseback transaction sponsored by Boustead Properties Berhad. The transaction is backed by 5 properties – Menara Boustead KL, The Curve shopping mall (The Curve), eCurve, Royale Bintang The Curve and Menara Affin (collectively known as the Portfolio or the Properties). The Senior Class A1, Senior Class A2, Senior Class B and Senior Class C Bonds are collectively referred to as “the Senior Bonds”.
The ratings of the Senior Bonds continue to be underpinned by the credit support provided by the senior-subordination structure, as well as the debt service coverage ratios and loan-to-value ratios of the Bonds – ranging from 1.83 to 2.03 times and 45.37% to 50.37%, respectively – that are commensurate with the respective ratings. Compared with transactions that are backed by a single asset/single-industry, the diversified Portfolio – comprising 2 retail malls (66% of the Portfolio’s market value), 2 office buildings (28%) and a hotel (6%) – offers some earnings protection, should any particular industry segment experience a sluggish period. With the exception of eCurve, we view the quality of the Properties as above average, with RAM Property Scores ranging from 4.00 to 4.25 (out of a maximum score of 5.00). The ratings are also supported by various structural features of the transaction, including an irrevocable power of attorney to dispose of the Properties upon the occurrence of a trigger or default event, designated accounts to control cashflow, and a 12-month coupon reserve for the Senior Bonds in the debt service reserve account.  
Notably, the amortising structure of the transaction reduces refinancing risk and provides for progressive reduction of the debt level that translates into increased credit support over time. If the first Property Call Option were to be exercised by end-January 2015, the scheduled deleveraging will lead to AAA-level credit benchmarks due to a higher collateral value backing Senior Class B and Senior Class C.
On balance, however, the transaction is exposed to substantial asset concentration risk as the largest property – The Curve – constitutes about half of the Portfolio’s overall market value and expected net property income. Tenant concentration is also a factor as 70% of space at Menara Boustead is occupied by internal tenants and Menara Affin is entirely occupied by Affin Bank Berhad. Nonetheless, we view the downside risk as limited, given that the tenants are mostly companies within the larger Lembaga Tabung Angkatan Tentera group (the ultimate parent of Boustead Holdings), and that these buildings act as their corporate headquarters. While the overall Portfolio’s net property income was 6.5% below our sustainable cashflow of RM49.8 million during the review period (mainly due to eCurve’s performance), it was within our expectations. Over the medium term, however, we expect its cashflow to ramp up and eventually converge towards our sustainable cashflow assumptions, thus supporting our adjusted valuation.
In the absence of a land charge, the bondholders’ security is evidenced by their beneficial interest in the Properties. To reinforce the security of the bondholders, the transaction includes additional measures/requirements such as legal caveats and the placement of original titles with the security trustee.
Meanwhile, the ratings of the Guaranteed Class D1, Guaranteed Class D2 and Guaranteed Class E Bonds reflect irrevocable and unconditional guarantees extended by RHB Bank Berhad (rated AA2/P1/RW_Positive) and Danajamin Nasional Berhad (rated AAA/Stable/P1), respectively.

Media contact
Lim Chern Yit
(603) 7268 1035
chernyit@ram.com.my