RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Al-‘Aqar Capital Sdn Bhd’s (the Issuer) RM272 million Class A and RM55 million Class B Sukuk Ijarah.

Published on 19 April 2016

RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Al-‘Aqar Capital Sdn Bhd’s (the Issuer) RM272 million Class A and RM55 million Class B Sukuk Ijarah. The reaffirmation is mainly premised on the underlying properties’ stable rental income given the long-term lease arrangements with KPJ Healthcare Berhad (KPJ Group or the Group). RAM also expects the business plans (i.e. new developments and land title exercises) relating to the properties to be managed prudently and in stages, to preserve the integrity of the transaction structure.

The 19 hospitals and 2 nursing colleges (the Portfolio or the Properties) generated a total rental income of RM84.43 million in FY Dec 2015, thereby meeting RAM’s assumed sustainable cashflow of RM78.24 million per annum. The resultant loan-to-value and debt service coverage ratios continue to commensurate with the respective ratings. Notably, 6 of the 7 property leases that are due to expire this year have been renewed for another 3 years; the other one will be up for renewal in July 2016. In this regard, the Group’s vested interest in the REIT (it directly owns 49% of the REIT) and the strategic importance of the Properties to KPJ Group’s operations provide an incentive to ensure the transaction’s continued performance and the servicing of the lease.

Meanwhile, a number of Property’s titles are at present with or are required to be submitted to the Land Office for various purposes (e.g. re-alienation and surrender, amalgamation and/or lease registration). This is in line with the local authorities’ requirements to facilitate KPJ Group’s development plans and in compliance with local planning guidelines. While the overall credit support for the transaction remains intact during such activities, we note the transitory risks that may arise relating to the transfer or perfection of charges in this period. To moderate the risk, we understand that these land-title exercises will be done one at a time. We derive further comfort from the statement by Damansara REIT Managers Sdn Bhd – as the manager of the REIT and the appointed servicer of the transaction – that the right to deal with the affected titles resides only with authorised third parties, i.e. the appointed legal counsel, the Land Office and the Security Trustee, during the process. In addition, Al-‘Aqar Capital and the REIT have a negative pledge on dealing with the securitised assets.

RAM highlights that the ratings are vulnerable during disposal events as some of the Properties currently have new developments (initially funded by KPJ Group) on the same land title charged to the Sukuk holders. We opine that any disposal before KPJ Group is fully compensated (in cash or in kind) for the costs incurred may add to the complications during the transfer and disposal of the properties. Such complications could delay the disposal process beyond the 2-year tail period. Nonetheless, this is moderated by KPJ Group’s first right of refusal to purchase the assets within a stipulated time frame and the portfolio’s diversity in terms of the number of assets. As additional comfort during the reviewed period, KPJ Group will undertake to not disrupt the disposal of the properties undergoing new developments should it unable or waive its right to exercise the first right of refusal to purchase the Properties.

In the meantime, the transaction is exposed to significant single-counterparty risk as all the operators of the Properties are subsidiaries of KPJ Group. Although the Group had met its lease obligations as per the lease terms during the reviewed period, we remain cautious on its aggressive planned expansion.

Al-‘Aqar Capital is a special-purpose vehicle incorporated by Al-‘Aqar Healthcare REIT to issue Islamic securities under its RM1 billion Islamic MTN Programme (2013/2028). As at end-December 2015, the Properties secured against the first issuance under the MTN Programme were valued at a collective RM1.20 billion.

Media contact
Lim Chern Yit
(603) 7628 1035
chernyit@ram.com.my