RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB or the Issuer) RM110 million Class A to Class D Sukuk under its First Sukuk Issue (collectively referred to as “the First Sukuk”); all the ratings have a stable outlook.

Published on 13 August 2014

RAM Ratings has reaffirmed the respective AAA, AA1, AA2, and AA3 ratings of Axis REIT Sukuk Berhad’s (ARSB or the Issuer) RM110 million Class A to Class D Sukuk under its First Sukuk Issue (collectively referred to as “the First Sukuk”); all the ratings have a stable outlook.
ARSB is a special-purpose vehicle set up by Axis Real Estate Investment Trust (Axis REIT) as a funding conduit for its 15-year Islamic MTN Programme of up to RM300 million (Sukuk Programme). The First Sukuk, i.e. the initial issuance under the Sukuk Programme, is backed by a portfolio of 3 industrial and industrial-office mixed properties and 1 retail property (the Properties).
The ratings remain supported by commensurate loan-to-value (LTV) ratios and stressed debt service coverage ratios (DSCRs), based on our assessed sustainable value of the Properties and the structural support for the transaction. We expect these assets’ net property income (NPI) to be able to continue supporting its sustainable value, despite some near-term rental adjustments. The sustainable capital values of the Properties reflect their above-average quality given their strategic locations and accessibility, as well as the underlying standard- to long-term leases that provide cashflow visibility. As part of the trigger mechanism, the transaction imposes minimum performance covenants on ARSB and Axis REIT. We note that the finance service coverage ratios of both entities remained at a healthy 4.18 times and 6.03 times, respectively, in fiscal 2013.
The ratings are, however, moderated by significant tenant-concentration risk as 3 out of the 4 Properties are occupied by single tenants, with limited asset diversity. The risk of income loss would be material should any of the tenants choose not to renew their existing tenancy agreements. Furthermore, the property manager may be more inclined to compromise on rental rates in a bid to retain occupants for single-tenanted properties.
That said, the expected cashflow from the lengthy leases (which accounts for close to 60% of the portfolio’s sustainable NPI) will amply cover the profit obligations under the transaction should there be any temporary void arising from Axis Vista and Axis Steel Centre, the tenancies of which span typical 3-year terms. In addition, we take comfort in the property manager’s tenant-retention strategies, the assets’ strong property profile and the positive outlook on the industrial property segment. On this note, we believe that the non-renewal risk of any expiring leases and the time lag in securing replacement tenants should be minimal.

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Tan Han Nee
603 – 7628 1023
hannee@ram.com.my