RAM Ratings has reaffirmed the respective AAA/Stable and C3/Stable ratings of Ara Bintang Berhad’s RM330 million Second Senior MTN and RM730 million Third Junior MTN under its RM1.25 billion MTN Programme. The reaffirmation is premised on the underlying assets’ combined net property income (NPI), which has performed within expectations although the individual properties - Starhill Gallery and Lot 10 Shoppin

Published on 03 November 2016

RAM Ratings has reaffirmed the respective AAA/Stable and C3/Stable ratings of Ara Bintang Berhad’s RM330 million Second Senior MTN and RM730 million Third Junior MTN under its RM1.25 billion MTN Programme. The reaffirmation is premised on the underlying assets’ combined net property income (NPI), which has performed within expectations although the individual properties - Starhill Gallery and Lot 10 Shopping Centre (collectively, the Properties or the Portfolio) – have turned in mixed results. We have maintained the adjusted valuation of RM745 million for the Portfolio; its capital value continues to adequately support the ratings.

Concurrently, RAM has assigned C3/Stable ratings to Ara Bintang’s proposed RM10 million Fourth Junior MTN and RM10 million Fifth Junior MTN. The ratings reflect their deeply subordinated nature - both structurally and legally - and leverage of more than 100% based on RAM’s sustainable valuation.  The additional Junior MTNs – expected to be issued in 2 tranches during 1H 2017 – will bring the total expected outstanding sum of Junior MTNs to RM750 million. Both the additional Junior MTNs will have coterminous maturities and rank pari passu with the Third Junior MTN. The proceeds from these additional issuances will be utilised for renovation and asset-enhancement work at Lot 10. Following their issuance, the cumulative LTV ratio of the Junior MTNs will increase to 145% while the DSCR will decrease to 0.72 times, which commensurates with the current rating.

Notably, the MTNs are backed by the Properties’ above-average asset quality, given their strategic location in the Bukit Bintang area in the heart of Kuala Lumpur. The transaction’s structural features include 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 approximately 54% of the combined net lettable area (NLA) of the Properties and accounted for about 40% of their rental income in 1Q FY Dec 2016. Additionally, about 78% of their total NLA is due to expire by end-June 2017.

While NPI performance during the reviewed period was broadly in line with RAM's assessed sustainable cashflow, we observe a general deterioration in rental collections – consistent with the performance of other retail assets under our coverage – given the present economic headwinds and subdued consumer spending. This had led to a wider-than-expected deviation of about 17% between the rental cashflow and NPI for the period. Nevertheless, we expect the Properties’ adjusted valuation to remain intact relative to the valuation psf of the closest comparable retail properties. Going forward, retail assets such as Starhill and Lot 10 will continue facing pressure in the management of rental collections, tenant attrition and maintaining positive rental revisions, particularly given the soft market conditions and increasing competition as new retail space comes on-stream. For the reviewed period, Ara Bintang received RM79 million of annual lease payments from the transaction's Master Tenant – Katagreen Development Sdn Bhd (a subsidiary of the YTL Group) – against the Portfolio’s NPI of RM69 million.

The master tenancy agreement (guaranteed by YTL Corp) – currently in its final term – is scheduled to expire in June 2019, a few months shy of the scheduled expected maturity of the Second Senior MTN. We are likely to maintain our adjusted valuation barring any significant deterioration in asset performance, as our evaluation incorporates the performance of the Properties’ tenants, without any consideration of the master tenancy. The Properties’ current performance indicates that their NPI should sufficiently cover coupon payments and other senior expenses on the Second Senior MTN given their actual DSCR of 4.55 times in 1H FY Dec 2016. Principal redemption of the MTN upon 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                                        Media contact
Irene Wong                                                    Padthma Subbiah
(603) 7628 1076                                            (603) 7628 1162
Irene@ram.com.my                                       padthma@ram.com.my