Gandalf Capital Sdn Bhd - 2007

MARC has affirmed its ratings on Gandalf Capital Sdn. Bhd.’s (Gandalf Capital) RM118.0 million CPs/MTNs (the Notes) comprising RM87.0 million Class A Notes, RM16.0 million Class B Notes  and RM15.0 million  Class C Notes. The Class A Notes are rated MARC-1/AAA; the Class B Notes are rated MARC-1/AA; and the Class C Notes are rated MARC-1/A. The affirmed ratings reflect the stable loan-to-value (LTV) ratios of all three classes of notes since issuance, and the satisfactory performance of the securitised properties underpinned by the stable rental flows from creditworthy lessees, and cash flow coverages that are strong for their respective rating levels on the Notes.

Gandalf Capital, a special purpose vehicle was incorporated to raise funding for its parent, Quill Capita Trust (QCT), a real estate investment trust (REIT). Quill Capita Management Sdn. Bhd. (QCM), is the REIT manager of QCT, with major shareholders comprising CapitaLand RECM Pte. Ltd. (CRPL), Quill Resources Holding Sdn. Bhd. and Coast Capital Sdn. Bhd.  QCT benefits from the expertise of QCM’s shareholders, particularly CRPL, a wholly-owned subsidiary of CapitaLand Financial Limited (CFL), the real-estate fund management and financial advisory arm of CapitaLand Limited.

Proceeds from the issuance of Class A and Class B Notes were on-lent to QCT to acquire four purpose-built office properties located in Cyberjaya, namely, Quill Building 1, Quill Building 2, Quill Building 3 and Quill Building 4 (the properties).  Gandalf Capital has a third party first legal charge on the properties including third party assignment over all rights and benefits under the properties’ insurance policies.  The Notes have been structured with bullet maturities with expected and legal maturities at the end of the fifth and seventh year respectively from issuance providing a two-year tail period for Gandalf Capital to either dispose the properties or refinance the outstanding Notes prior to its legal maturity. The security agent will have the discretion to proceed with the disposal of the properties on behalf of noteholders upon the occurrence of a trigger event.

The properties are office buildings with total net lettable area of 493,118 square feet, located in the enterprise zone within the Flagship Zone of Cyberjaya. As at 31 December 2007, the properties are 100% occupied with lessees comprising of, amongst others, Asia-Pacific Information Services Sdn Bhd (a wholly-owned subsidiary of DHL Worldwide Express B.V), HSBC Electronic Data Processing (Malaysia) Sdn. Bhd. and BMW Asia Technology Centre Sdn. Bhd. Despite the high lessee concentration, the risk is partially mitigated given the initial lease tenures which range from four to seven years with option for renewal thereafter.  The expiry of the initial term of existing leases will commence from November 2009 through August 2011. MARC views the likelihood for renewal as high in view of the significant renovations undertaken and costs already incurred by the lessees as well as the significance of the operations of some of the lessees at the properties.  Going forward, the net operating income (NOI) of the properties is expected to trend upwards with expected growth of approximately 3.0% year-on-year, in view of rental escalation provisions incorporated in the lease. 
 
For the thirteen-month period under review (1 December 2006 to 31 December 2007), Gandalf Capital reported revenue of RM27.3 million and net operating income of RM22.1 million, in line with the assessed annual sustainable NOI of RM20.53 million. The assessed capital value of the property at RM228.1 million remains stable and the respective LTVs of Class A, B and C, commensurate with their respective rating levels. For the period under review, based on outstanding Notes of RM91.0 million comprising RM87.0 million Class A Notes and RM4.0 million Class B Notes, the estimated DSCR for Class A and B Notes were 5.9 times and 5.7 times respectively, well above the minimum required for their respective rating levels. Since issuance, the properties have been revalued to RM303.0 million (2006: RM276.1 million) by Messrs CH Williams Talhar & Wong, as at January 2008, which represents a 10% upward revaluation. MARC will review its assessed sustainable NOI in the event Gandalf Capital meets its projected NOI for 2008.