Published on 09 Apr 2018.
RAM Ratings has reaffirmed the respective AAA/Stable, AA3/Stable and AAA/Stable ratings of Lucida Capital Berhad’s Senior Class A MTN, Senior Class B MTN (collectively, the Senior MTN), and Stand-Alone Class C MTN. The reaffirmation is premised on the stable performance of the securitised property, i.e. Quill 6 (the Property), underscored by HSBC Bank Malaysia Berhad’s (rated AAA/Stable/P1 by RAM) prompt lease payments and within-budget operating expenditure, as well as our view that the assessed adjusted valuation of the Property remains adequate relative to comparable valuations of recently transacted office buildings in Kuala Lumpur. For 9M Dec 2017, Quill 6’s annualised net property income of RM13.5 million was within RAM’s expectations during the initial 2 years of issuance before meeting our sustainable cashflow assumption of RM14.4 million.
In June 2017, HSBC Malaysia announced its intention to construct its headquarters at Tun Razak Exchange. Consequently, Khong & Jaafar’s (the appointed independent valuer of the Property) most recent valuation of Quill 6 declined from RM221 million to RM170 million, reflecting the high probability of HSBC Malaysia not renewing its tenancy after 2022. Notably, RAM had considered this likelihood during our initial rating exercise as well as the requisite gestation period for rental income to recover to a healthy level, given current market conditions. Based on our assessment, we expect full repayment of the Stand-Alone MTN on their expected maturity dates and timely coupon payments on the Senior MTN during the tail period.
This transaction has a commercial real estate-backed/credit-tenant lease hybrid structure. As the ultimate recourse for the Senior MTN depends on the sale of the Property, the ratings of the Senior MTN reflect the collateral support provided by the underlying property. Meanwhile, principal and coupon obligations in respect of the Stand-Alone MTN will be met solely by lease payments from HSBC Malaysia. As such, the AAA rating of the Stand-Alone MTN is reflective of the credit risks of HSBC Malaysia, as the primary obligor under the transaction. Any change in HSBC Malaysia’s credit profile will result in a revision of the Stand-Alone MTN’s rating.
Given the maintenance of our adjusted valuation, the respective loan-to-value (LTV) ratios of 45.6% and 53.5% and stressed debt service coverage ratios (DSCRs) of 2.26 times and 1.93 times continue to provide adequate backing for the AAA and AA3 ratings of the Senior MTN. With no plans for a further drawdown, the respective LTV and DSCR of 27.3% and 3.76 times provide superior credit support for the outstanding Senior MTN of RM45 million. RAM will continue to monitor vacancies and rental rates in the property sector and reassess the adjusted valuation if required.
The transaction includes pre-defined trigger events such as notice of lease termination, failure to maintain a minimum interest service coverage ratio (ISCR), occurrence of a total loss event and failure to redeem any MTN on their respective expected maturity dates. In such an event, Quill Towers Sdn Bhd (the Originator) and/or its nominees or nominated third party can exercise either the MTN Call Option or the Property Call Option. Otherwise, the security agent can commence the asset disposal process. We highlight that the ratings of the Senior and Stand-Alone MTN may be downgraded if the MTN Call Option is exercised and we obtain no clear visibility on the disposal process as the transaction approaches its legal maturity. Over the review period, Lucida recorded an ISCR of 4.11 times – above the minimum 1.50 times – with no distributions made.
Lim Chern Yit
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