MARC has affirmed the long-term ratings on Special Coral Sdn Bhd's (Special Coral) RM300.0 million Senior Class and RM800.0 million Subordinated Class Medium-Term Notes (MTN) under the RM1.1 billion MTN Programme.

May 26, 2016

MARC has affirmed the long-term ratings on Special Coral Sdn Bhd's (Special Coral) RM300.0 million Senior Class and RM800.0 million Subordinated Class Medium-Term Notes (MTN) under the RM1.1 billion MTN Programme. The outlook on the ratings is stable. The list of ratings is shown in the table below.

Tranche size       Issued amount  Rating action      Current ratings

Senior Class MTNs                                                          

1.            Class A          RM160 million            RM160 million    Affirmed              AAA

2.            Class B          RM40 million              RM40 million      Affirmed              AA+

3.            Class C          RM35 million              -                              Affirmed              AA-

4.            Class D          RM25 million              -                              Affirmed              A-

5.            Class E           RM10 million              -                              Affirmed              BBB-

6.            Class F           RM30 million              -                              Affirmed              BB-

Subordinated Class MTNs            RM800 million    RM476 million    Affirmed              B-

Total      RM1.1 billion      RM676 million                   

The MTNs are secured by a first legal charge over the eight-storey Queensbay Mall, of which Special Coral had acquired 90.5% of the gross retail area from proceeds of the MTN issuance. The ratings on the Senior Class Notes reflect Special Coral's strong loan-to-value (LTV) ratios and the high debt service coverage ratio (DSCR), supported by its stable net operating income (NOI) and high occupancy levels of the retail mall. The ratings on Class B Notes and the subsequent classes are notched lower to reflect their structural subordination and the lower order of priority of payments relative to Class A Notes.

As at December 31, 2015, Queensbay Mall registered occupancy levels of 98.6% of its net lettable area of 868,147 sq ft while the average rental rate stood at RM7.75 psf, an increase from RM7.17 psf from the previous year. The higher average rental rate as well as tenants' improved sales performance led to an 8.1% y-o-y revenue increase to RM94.8 million for 2015. The NOI improved to RM62.3 million while MARC's stabilised average NOI for the last five years stood at RM50.2 million. Based on the stabilised NOI and capitalisation rate of 9%, MARC has revised the valuation of Queensbay Mall from RM460.0 million to RM558.3 million, representing a 37.9% discount of the retail mall's market value of RM899.6 million as at December 31, 2015. Located in Bayan Lepas, Penang, the retail mall comprises 332 retail lots, two levels of basement carparks and six levels of elevated carparks.

With the revised valuation, the LTV ratios of the Class A through Class F Notes reduced to between 28.7% to 53.7%. In addition, the DSCR for the Class A and Class B Notes remained strong at 5.37 times and 4.23 times respectively in 2015; both Class A and Class B Notes are non-amortising with the expected maturity on March 31, 2017 and the legal maturity on October 1, 2018.

The tenure of Queensbay Mall's leases are generally three years and are in line with market norm. Risk of non-renewal of leases is mitigated by management's track record of achieving high occupancy rates for the property. Non-renewal risk is also mitigated by low tenant concentration risk where each tenant contributes not more than 2.0% of the gross rental revenue with the exception of the anchor tenant, AEON Co. (M) Berhad. MARC draws comfort from parental support extended by CapitaLand Limited (CapitaLand) through an irrevocable and unconditional undertaking by wholly-owned subsidiary, CapitaLand Mall Asia Limited (CMA) to cover any shortfalls in meeting the interest amount under the Senior Notes. The rating differential between the Senior Notes and the Subordinated Notes reflects higher risk of non-payment under stressed conditions on the latter.

Special Coral's CFO interest coverage stood lower at 0.8 times as at December 31, 2015 from 1.2 times in the previous year despite a partial deferment of coupon payments on the Subordinated MTNs. The partial deferment since 2011 has contributed to the increase of Special Coral's non-trade interest payables to RM138 million. Noteholders are subject to refinancing risk given the bullet repayment of the notes but this is mitigated by the following two features of the programme: the security trustee's power of attorney to dispose the retail mall within an 18-month tail period between the expected and legal maturities; and two call options exercisable by CMA to purchase either the outstanding Senior MTNs or the retail mall.

The stable rating outlook is premised on MARC's expectations that the operational and financial performance of Queensbay Mall would remain supportive of ratings.

Contacts: Nicola Tan, +603-2082 2262/ nicola@marc.com.my

David Lee, +603-2082 2255/ david@marc.com.my