FW: RAM Ratings reaffirms ratings of Starhill Global's securitisation instruments issued via Ara Bintang, revises outlook on Second Senior MTN to negative

Published on 13 Sep 2017.

RAM Ratings has reaffirmed the AAA/Stable and C3/Stable ratings of Ara Bintang Berhad’s RM330 million Second Senior MTN, RM730 million Third Junior MTN, RM10 million Fourth Junior MTN and RM10 million Fifth Junior MTN (collectively, the Junior MTN) under its RM1.25 billion MTN Programme. Concurrently, we have revised the rating outlook on the Second Senior MTN from stable to negative; the outlook on the Junior MTN remains stable. The transaction is a property securitisation involving Starhill Gallery and Lot 10 Shopping Mall (collectively, the Properties), both assets within the portfolio of Starhill Global REIT – a retail and office real estate investment trust listed in Singapore.

MTN	Rating/Outlook	Issue Amount (RM million)	Expected Maturity	Legal Maturity
Second Senior MTN	AAA/ Negative	330	17 Sep 2019	17 Mar 2021
Third Junior MTN	C3/ Stable	730	17 Sep 2019	17 Mar 2021
Fourth Junior MTN	C3/ Stable	10	17 Sep 2019	17 Mar 2021
Fifth Junior MTN	C3/ Stable	10	17 Sep 2019	17 Mar 2021

 

The revision of the rating outlook - from stable to negative - for the Second Senior MTN is premised on our concern that the competitive retail operating environment and weaker consumer sentiment could further dampen the performance and recovery prospects of the Properties. For 9M FY Jun 2017, the Portfolio recorded an annualised RM63.9 million of net property income (NPI) – the first time it has fallen below RAM’s assumed sustainable cashflow of RM66 million per annum. With the REIT’s staggered refurbishment plans for the Properties over the next 2 years, the overall NPI of the Properties will likely remain below RM66 million. We will reassess the sustainable NPI or applied capitalisation rate if there is any increase in or prolonged vacancy rates arising from either tenants' downsizing or exiting the Properties, weaker or negative rental reversions, or relaxed credit policies following a more aggressive tenant-retention strategy. 

Meanwhile, the reaffirmation of the ratings continues to reflect the available credit support provided by the underlying assets in the form of cumulative loan-to-value (LTV) ratios and debt service coverage ratios (DSCRs). In 9M FY Jun 2017, the cumulative LTV ratios of 44.3% and 145.0% as well as stressed DSCRs of 2.35 times and 0.72 times remain commensurate with the respective ratings of the RM330 million Second Senior and RM750 million Junior MTN. The adjusted valuation of RM745 million for the Portfolio is expected to stay intact against the valuation of closest comparable retail properties, barring further deterioration in the Properties’ performance. 

Notably, the MTNs are backed by the Properties’ above-average asset quality, underscored by their strategic location in the Bukit Bintang area in the heart of Kuala Lumpur, along with increased footfall on account of the newly opened Mass Rapid Transit (MRT) and the reopening of Isetan the Japan Store. On the other hand, the Portfolio’s near-term performance will be constrained as it undergoes asset refurbishment, albeit in stages. It also remains to be seen if such asset-enhancement activities will be yield accretive, given the current challenging retail outlook and weak consumer sentiment. That said, the transaction’s structural features provide further credit enhancement to the bondholders by including the Master Tenancy Agreements, mechanisms to initiate the sale of the Properties upon the occurrence of trigger events, and the availability of 6-month coupon reserves in the designated accounts to address liquidity risk. 

Nonetheless, the transaction remains exposed to significant tenant-concentration risk and lumpy tenancy profiles; YTL Corporation Berhad (YTL Corp) and its group of companies (YTL Group) occupy more than half of the combined net lettable area (NLA) of the Properties, contributing about 40% of their rental income in 9M FY Jun 2017. Additionally, the tenancy agreements for about 63% of their total NLA are due to expire by 2018. Despite this, we derive comfort from YTL Corp’s strong credit profile and its implicit support through the guaranteed master tenancy agreement, to ensure the continued servicing of the transaction. In 9M FY Jun 2017, Ara Bintang received a total of RM63 million of monthly rental payments from the Master Lessee, and expects to receive about RM84 million in total by end-June 2017. The actual DSCR of the Senior MTN stood at 5.30 times as at end-Dec 2016, and remained compliant with the transaction’s minimum requirement of 1.50 times. 

Currently in its final term, the master tenancy agreement is scheduled to expire in June 2019, a few months shy of the scheduled expected maturity of the Second Senior MTN. If this agreement is not extended upon expiry, there may be a downward revision in the Properties’ market value given the difference in their NPI performance and the contracted annual lease paid by the Master Lessee. Principal redemption of the MTN upon its expected maturity is envisaged to be met through the issuance of new MTN under the Programme, and/or via the exercise of a call option granted by Ara Bintang, or the disposal of the Properties in the open market.

 

Analytical contact
Irene Wong
(603) 7628 1076
Irene@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my