RAM Ratings has reaffirmed the AAA/Stable rating of Eternal Icon Sdn Bhd’s (EISB) RM87.0 million Senior Medium-Term Notes (Senior MTN).

Published on 20 April 2016

RAM Ratings has reaffirmed the AAA/Stable rating of Eternal Icon Sdn Bhd’s (EISB) RM87.0 million Senior Medium-Term Notes (Senior MTN). The reaffirmation reflects our view that the collateral’s performance remains supportive of our assumed sustainable net property income (NPI) of RM18.5 million per annum. The resultant loan-to-value ratio of 44.7% and stressed debt-service coverage ratio of 2.13 times remain consistent with our benchmarks for an AAA rating.

Despite a challenging operating environment in 2015, Plaza 33 (the Property) achieved an annualised NPI of RM21.4 million, higher than our assumed sustainable NPI of RM18.5 million, mainly due to its improved average occupancy rate. Notwithstanding the overhang in the office and retail sectors, Plaza 33 achieved full occupancy in October 2015 – attributable to its competitive average rental rate (ARR), strategic location and overall property quality, albeit a year later than the management’s initial expectations. Nonetheless, we have maintained our sustainable NPI assumption for now, until the asset seasons further and/or the planned construction of an additional floor atop Tower A is firmed up.

We observe that Plaza 33’s ARR is comparable to its competitors’ and remains attractive. That said, we remain wary of the various developments in Plaza 33’s immediate vicinity, which will heighten competition in the longer run; at least 15 office buildings are currently planned for or at various stages of development in Plaza 33’s neighbourhood. Given the general oversupply in the office sector, Plaza 33 will need to continue offering attractive terms and competitive rental rates to retain or attract tenants.

We also note that Plaza 33 is an unseasoned asset, with a concentrated tenancy and lease-maturity profile. The Property’s top 3 tenants contribute 40.6% of its revenue, and 66.8% of its combined net lettable area is due for renewal in 2016 – its first renewal cycle. This risk is, however, partly moderated by the quality of its lease profile and the rate of renewals observed thus far. As the Property approaches its first renewal cycle this year, the top 3 tenants have not indicated any intention to vacate.

This transaction is a commercial real estate-backed transaction sponsored by Plaza 33 Sdn Bhd – the owner of Plaza 33, an integrated commercial office building in Section 13, Petaling Jaya. Under the 15-year MTN Programme of up to RM400.0 million, RM86.0 million of Senior MTN and RM220.0 million of Subordinated Class Medium-Term Notes (Sub-MTN) have been issued to date. In addition, EISB will later issue up to RM2.2 million of Redeemable Preference Shares as part of the funding structure. Under the transaction, EISB will use net rental collections from the Property to pay its coupon obligations on the Senior MTN. The principal redemption is expected to be met through the exercise of the Property Call Option upon the expected maturity, or refinancing through the issuance of the Sub-MTN (failing this, through the sale of the Property by the Security Trustee).

Media contact
Daniel Wong
(603) 7628 1172
danielwong@ram.com.my