Central Impression Sdn Bhd - 2014

Rationale   MARC has assigned a rating of AA- with a stable outlook to Central Impression Sdn Bhd’s (CISB) proposed 11-year Fixed Rate Serial Bonds of up to RM120.0 million. The issuer is a single-purpose company which was established to own and develop AEON Klebang, a three-storey shopping mall in Ipoh, Perak. The proceeds from the bond issuance will be used to part finance the mall construction cost of RM190.6 million.

The assigned rating and outlook are mainly premised on the strong creditworthiness of the principal tenant, AEON Co. (M) Berhad (AEON), which will lease the whole shopping mall upon completion and bear the downside risks, in particular those associated with occupancy levels and sublease tenant credit. The rating also incorporates adequate mitigating factors during the construction period through a performance guarantee from United Overseas Bank (Malaysia) Bhd (UOBM) of up to RM120.0 million. In the event of construction delay, CISB is required to seek an extension of the performance guarantee to cover the extended construction period.

The AEON Klebang project is located on a 16.09-acre site in Hulu Kinta, Ipoh. Construction commenced in July 2013, and is 23.6% completed as of August 25, 2014. Construction works are expected to be completed by mid-2015. MARC considers the completion and cost overrun risks to be mitigated by the moderate complexity of the project and by the terms of the fixed-priced contract with contractor Sycal Berhad (Sycal). MARC views Sycal to have an adequate construction track record and notes that it has collaborated with AEON on other construction projects, including the AEON Taiping shopping mall in Taiping, Perak, which is expected to be completed by end-2014. Upon completion and receipt of the Certificate of Completion and Compliance for the AEON Klebang shopping mall, AEON will lease the shopping mall for an initial tenure of 10 years with an option to extend the lease for a further three terms of five years each. The annual lease rental payments for the shopping mall which has a net lettable area (NLA) of about 506,000 sq ft is about RM18.3 million (about RM3.01 psf/month), and will commence one month after the signing of the lease agreement.

The rental proceeds will be captured in designated accounts and will be the main source of repayment for the bonds. Under the terms of the bond issuance, CISB will pre-fund the bond’s debt service reserve account (DSRA) with an amount equivalent to 18 months’ coupon payments from proceeds of the bond during the construction phase. The rating agency views the performance guarantee from UOBM and the pre-funded DSRA as sufficient to provide a buffer against any potential delays in construction works. Post construction period, CISB is required to maintain a debt service cover ratio (DSCR) of a minimum 1.50 times of coupon and principal payments for each financial year. In addition, MARC also draws comfort from the requirement to maintain a DSCR of at least 1.75 times before any payouts are made to the shareholders of CISB.

Based on MARC’s sensitivity analysis on CISB’s cash flows, the company’s debt servicing ability will largely depend on a build-up of cash reserves early in the tenure of the proposed bonds. The cash build-up in the early years of the issuance will enable CISB to meet the schedule of bond redemptions of RM5.0 million per year for the first two years of issuance and up to RM15.0 million per year throughout the bond tenure. In addition, the requirement for a full cash build-up of the DSRA prior to the expiry of the initial term of 10 years of the lease agreement mitigates the risk of the lease expiring before the maturity of the bonds.

MARC notes that CISB is exposed to termination risk if the company fails to meet its obligations under the lease agreement. While CISB has a limited operating track record in shopping mall property management, maintenance risk is moderated by the company’s limited obligations with respect to the building’s structural aspects, insurance provision and quit rent payments. Furthermore, Sycal has provided a guarantee to AEON to ensure CISB’s fulfilment of its responsibilities throughout the tenure of the lease.

The stable rating outlook incorporates the sufficient protection provided to the bondholders during the construction period while longer-term rating prospects will hinge on AEON’s creditworthiness to meet its terms under the lease agreement. Downward rating pressure, however, could occur in the event of a prolonged construction delay beyond the performance guarantee period and/or delays in executing the lease agreement between the rated entity and principal lessee.

Major Rating Factors

Strengths

• Lease rentals from creditworthy principal tenant AEON will provide steady income; and
• Performance guarantee provided by UOBM during the construction period. 
  

Challenges/Risks

• Lack of operating track record; and
• Possible delay in construction completion.