RAM Ratings reaffirms ratings of Al-'Aqar Healthcare REIT's RM655 million Sukuk Ijarah, issued through Al-'Aqar Capital

Published on 24 June 2015

RAM Ratings has reaffirmed the respective AAA/Stable and AA2/Stable ratings of Al-‘Aqar Capital Sdn Bhd’s (Al-‘Aqar Capital or the Issuer) RM272 million Class A and RM55 million Class B Sukuk Ijarah. Al-‘Aqar Capital is a special-purpose vehicle incorporated by Al-‘Aqar Healthcare REIT (the REIT) to issue Islamic securities under its RM1 billion Islamic MTN Programme (2013/2028). This is the first issuance (Issue 1) under the MTN Programme and is backed by 19 hospitals and 2 nursing colleges (collectively, the Properties), valued at RM1.17 billion as at end-December 2014.
The reaffirmation is premised on the debt service coverage as well as loan-to-value ratios that commensurate with the respective ratings. The transaction’s structural features, such as the Security Trustee’s ability to manage and dispose of the Properties upon a Trigger Event, the provision of a 2-year tail period on asset disposal, and stable lease payments from the hospitals, continue to underpin the ratings. In FY Dec 2014, the RM82.86 million of rental income derived from the Properties remained satisfactory against our assumed lease payments of RM78.2 million per annum. Leases that had been due for review in 2015 have had their rental rates revised for another 3–year term, as provided for under the 15-year lease agreements, under which the lease payments will be revised every 3 years. 
RAM highlights that the transaction is exposed to significant single-counterparty risk as all the operators of the Properties are subsidiaries of KPJ Healthcare Berhad (KPJ Group or the Group). Although the Group had met its lease obligations as per the lease terms during the reviewed period, we remain cautious on its aggressive expansion plans. Nonetheless, 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 a strong incentive to ensure the continued performance of the transaction.
Meanwhile, the exercise period for the one-off early partial-redemption option on the unrated Class C Sukuk Ijarah has been extended indefinitely. Under the transaction, this option may be exercised using the disposal proceeds from the other assets of the REIT. Following the exercise of the one-off early partial redemption, the remaining outstanding Class C Sukuk Ijarah can only be redeemed on the expected maturity date of Issue 1, in order of seniority.

We note that a number of property titles are at present with or are required to be submitted to the Land Office for various purposes, including for re-alienation and surrender exercise, as well as amalgamation. 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 risk relating to the transfer or perfection of charges during this period. The risk is, however, moderated to some extent as the right to deal with the affected titles only resides with authorised third parties, i.e. the appointed legal counsel, the land office and the Security Trustee. 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 a trigger event as some of the Properties under Issue 1 currently have new developments (initially funded by KPJ Group) on the same land title charged to the Sukuk holders. We highlight that any disposal prior to KPJ Group being fully compensated (in cash or in kind) for the costs incurred may add to the complications during transfer and disposal of the property. Such complications could potentially delay the disposal process beyond the 2-year tail period. If all proposals proceed as planned, RAM considers the existing tail period of 2 years as less supportive of the overall transaction should any complications arise.
As it is, the specialised and illiquid nature of hospitals already renders them harder to sell as potential buyers are likely to be limited to other hospital operators. While a respective 14.1% and 14.3% of the portfolio’s market value and number of assets are currently exposed to new developments, we highlight that the rating of the Class A Sukuk Ijarah will come under pressure if such proportion of properties exceeds 20% of the total portfolio’s market value or number of properties, whichever comes first. We will maintain close monitoring of these exposures and reassess the impact on the transaction when more information is made available.

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