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MARC has affirmed its ratings of MARC-1/AAA, MARC-1/AA and MARC-1/A to 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, respectively. The ratings carry a stable outlook. The affirmed ratings and stable outlook are premised on the low loan-to-value (LTV) ratios of all three classes of Notes since issuance, full occupancy rate of the properties, stable rental flows from creditworthy lessees, and strong cash flow coverages. However, the ratings are moderated by the uncertain economic outlook which may affect the renewal of leases expiring in 2009, exposure to fairly high single tenant concentration risk, and lack of property type and geographical diversification.
Gandalf Capital Sdn. Bhd. (Gandalf Capital) is a special purpose vehicle owned by Quill Capita Trust (QCT), a real estate investment trust (REIT) listed on Bursa Malaysia and established to raise funding for the acquisition of commercial property. QCT’s REIT manager is Quill Capita Management Sdn. Bhd. (QCM), which is mainly owned by Singapore based-CapitaLand RECM Pte. Ltd. (CRPL), Quill Resources Holding Sdn. Bhd. and Coast Capital Sdn. Bhd. QCT benefits from the property management 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 Singapore government-linked CapitaLand Limited. Listed on Singapore Stock Exchange, CapitaLand is one of Asia’s largest real estate companies.
Proceeds from the initial issuance of RM87.0 million Class A and RM4.0 million Class B Notes were used to fund QCT’s acquisition of four purpose-built office properties, Quill Building 1, Quill Building 2, Quill Building 3 and Quill Building 4 (the properties) in Cyberjaya, Selangor. Under the transaction structure for the Notes, Gandalf Capital has a third party first legal charge on the properties valued at RM303 million as at December 31, 2007 including a 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 their 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, which notably includes the failure of Gandalf Capital to meet the debt service reserve account (DSRA) requirement and/or redeem all the Notes in expected maturity.
The freehold properties are office buildings with total net lettable area of 493,118 square feet, located within Cyberjaya’s Flagship Zone. As at September 30, 2008, major tenants of the fully occupied properties include 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. MARC notes approximately 63.2% of the properties’ total net lettable area is due for renewal between March and November 2009, exposing Gandalf Capital to substantial tenant rollover risk. MARC understands that negotiations on the renewal of leases with DHL, BMW and HSBC are underway. MARC will closely monitor the lease renewals or reletting of the space, ensuing rates, which could be lower than present rates as a consequence of the current economic climate, as well as associated cash flow implications. Tenant credit risk is accessed to be low while the risk of early lease terminations is mitigated by the requirement for the lessee to provide rental income equivalent to the remaining term of the lease as compensation to QCT. For the period under review (Jan – Sept 2008), Gandalf Capital posted a RM15.1 million net operating income (NOI) backed by a total revenue of RM20.4 million. The interim NOI is within MARC’s expectation of sustainable NOI of RM20.53 million, which allows us to maintain our original RM228.1 million discounted cash flow (DCF) valuation of the properties. The market value of the properties at RM303.0 million is 32.8% higher than our DCF value. Outstanding notes totalled RM115.9 million as of December 11, 2008, comprising RM87.0 million Class A Notes and RM16.0 million Class B Notes and RM12.9 million Class C Notes. As at September 30, 2008, the interim debt service cover ratio (DSCR) for the facilities stood at 7.5 times, well above the minimum covenanted DSCR of 1.75 times. Stress tests to access the impact of reduction in rental rates and non renewal of leases, etc. indicate that the properties should maintain adequate DSCR coverages.
Major Rating Factors Strengths Above average quality of properties with full occupancy levels; Tenanted by reputable multinational companies; and Strong cash flow coverages commensurate with the respective rating levels.
Challenges/Risks - High single tenant concentration risk;
- Lack of property type and geographical diversification; and
- Uncertainty of economy may impact the renewal of leases expiring in 2009.
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