RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB or the

Published on 11 August 2016

RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB or the Issuer) RM110.0 million Class A to Class D sukuk under its First Sukuk Issue (collectively, the First Sukuk); all the ratings have a stable outlook. With the revision of RAM’s stressed refinancing rate to 8.5% (from 10.0%), the stressed debt-service coverage ratios (DSCRs) have increased substantially. Nevertheless, the ratings remain constrained by the loan-to-value (LTV) ratios, which are still consistent with our benchmarks for the relevant ratings.

The reaffirmation is premised on the overall stable net property income (NPI) of the portfolio, supported by the underlying properties’ strategic locations, longer-than-average lease maturities and healthy demand for the portfolio’s assets due to the shortage of comparable properties. ARSB is a special-purpose vehicle set up by Axis REIT as a funding conduit for its perpetual Islamic MTN Programme of up to RM3.0 billion (the Sukuk Programme). The First Sukuk – the first issuance under the Sukuk Programme – is backed by a portfolio of 3 industrial and industrial-office mixed properties and 1 retail property, i.e. Axis Steel Centre (ASC), Axis Vista (AV), Bukit Raja Distribution Centre and Tesco Bukit Indah.

The portfolio NPI of RM20.5 million in 2015 remained in line with our assumed NPI of RM20.0 million. Despite the present void at AV due to the recent departure of one of the portfolio’s 6 tenants (which accounted for 3.5% of the portfolio’s NLA and 5.3% of its revenue in 2015), we expect the portfolio’s stabilised annual NPI to remain in line with our initial assumptions. The average rental rates of the assets are still aligned with market rates while the portfolio’s adjusted capital value shows a discount of 31% to its market value. Correspondingly, the cumulative LTV ratios of 43.7%, 46.0%, 48.3% and 50.6% coupled with the revised DSCRs of 2.5 times, 2.4 times, 2.2 times and 2.1 times (from 2.1, 2.0, 1.9 and 1.8 times) correspond to the respective AAA, AA1, AA2 and AA3 ratings of the Class A to Class D sukuk.

We note overdue rentals of up to 3 and 5 months from 2 tenants in 2015 and 1Q 2016.  However, these issues have been largely resolved – 1 tenant has caught up on its payments while the security deposit and auction proceeds have been used to offset the overdue rentals from the other tenant at AV. A replacement is currently being sought for the vacant space at AV. Our sensitivity analysis incorporates these factors as the basis for our reaffirmation. We have not accorded any benefit to the new lease agreement pertaining to ASC, which is currently in an advanced stage of negotiations.

The ratings are, however, moderated by limited asset diversity and significant tenant-concentration risk, as the portfolio only contains industrial-related properties, and 3 of the 4 Secured Properties are single-tenanted. These factors expose the transaction to the cyclicality of the industrial property segment and the risk of significant income loss should any of the tenants’ relocation result in protracted vacancies. Nonetheless, the fixed long-term tenancies are expected to provide cashflow visibility over the medium term. In fiscal 2015, the collective NPI of the 2 Secured Properties with fixed long-term tenancies amounted to almost 2.50 times of the transaction's profit obligations, and contributed close to 60% of the portfolio’s rental revenue.

The ratings are also underpinned by structural features that enhance the liquidity and security of the transactions, e.g. minimum finance service coverage ratio (FSCR) requirements at the levels of both the Issuer and the sponsor, as well as other trigger mechanisms to accelerate recovery via proceeds from the disposal of the underlying portfolio. We note that the respective FSCRs of the Issuer vis-a-vis the First Sukuk and Axis REIT remained healthy at 4.04 times and 3.37 times (after adjusting for deposits related to acquisitions) as at end-2015.

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