Gandalf Capital Sdn Bhd - 2009

MARC has affirmed its ratings of MARC-1/AAA, MARC-1/AA and MARC-1/A on Gandalf Capital Sdn Bhd’s (Gandalf Capital) RM118.0 million Commercial Papers/Medium Term Notes Programme (the notes) comprising RM87 million Class A, RM16 million Class B  and RM15 million  Class C notes respectively. The ratings carry a stable outlook. The affirmed ratings are premised on the low loan-to-value (LTV) ratios of all three classes of notes, continued full occupancy of the properties related to this transaction, timely and stable rental flows from lessees of good credit standing and payment practice, and strong cash flow coverages. Moderating the ratings is high single tenant concentration risk, which may pose downward pressure on rental rates or occupancy levels under difficult economic conditions.

Gandalf Capital is a special purpose vehicle owned by Quill Capita Trust (Quill Trust), a real estate investment trust (REIT) listed on Bursa Malaysia, and was established to raise funding for the acquisition of commercial property through issuance of the notes. Quill Trust’s REIT manager is Quill Capita Management Sdn Bhd (QCM), which is owned by CapitaLand RECM Pte Ltd (CRPL), Quill Resources Holding Sdn Bhd and Coast Capital Sdn Bhd. CRPL is a wholly-owned subsidiary of CapitaLand Financial Limited, the real-estate fund management and financial advisory arm of CapitaLand Limited. Quill Trust leverages on the fund management expertise of CFL through QCM. Listed on Singapore Stock Exchange, CapitaLand is one of Asia’s largest real estate companies. Proceeds from the initial issuance of RM87 million of Class A and RM4 million of Class B notes were to part-finance Quill Trust’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. The remaining drawn down amount of Class B and Class C notes were utilised for acquisition of other buildings for Quill Trust. All notes remain outstanding as of September 2009.

In consideration for the proceeds advanced to Quill Trust, Gandalf Capital assumed, among others, a third party first legal charge on the properties valued at RM304.4 million as December 2008, which also form the security/collateral assets for the noteholders in the event of default or occurrences of trigger events. The programme structure peculiar to this transaction, under which the properties are owned by a REIT, protect the noteholders by preventing the issuer from upstreaming of dividends to the REIT unitholders in the event of default or breaches of financial covenants.

The transaction relies on the performance of the properties for coupon payments and sale of the properties for principal redemption if Gandalf Capital fails to refinance the notes by the expected maturity date. The ability to sell the property is effected by a Power of Attorney (PoA) vested in the trustee of the notes. However, MARC expects the disposal of underlying properties to be a more time consuming process for Gandalf Capital due to the lengthy process of obtaining the requisite valuation and selecting appropriate bids (as per the PoA), and discharging the properties in question. Mitigating the delay in realisation of collateral value is the two-year tail period to legal final maturity date at the seventh year provides considerable time for the sale to be concluded within the facilities’ tenure.

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, 2009, all buildings are fully occupied by multinational companies such as Asia Pacific Information Services Sdn Bhd for DHL, HSBC Electronic Data Processing (M) Sdn Bhd and BMW Asia Technology Centre Sdn Bhd. Based on the tenancy schedule as of September 2009, the existing leases will on average run up to the first half of 2012, mitigating non-renewal risk during the tenure of the transaction, which matures in 2011. MARC also draws comfort from the essential nature of their operations in Cyberjaya, which will likely ensure continued lease of the buildings. Moreover, MARC also draws comfort from the fact that there are active enquiries for office space and the significant number of buildings intended to house business process outsourcing facilities that under various stages of construction in Cyberjaya. MARC also notes that, despite the dismal economic conditions exerting downward pressure on rental rates, all lease agreements that expired since 4Q2008 were renewed at the same rental rate or higher. Rental payments have been timely, with the risk of unpaid rent is somewhat buffered by security deposits collected from the tenants.

Given the non-amortising structure of the notes, the LTV ratios for Class A, Class B and Class C notes remained at comfortable levels of 38.5%, 45.5% and 52.0% respectively, based on MARC’s discounted cash flow (DCF) valuation of RM228.1 million of the properties. For the period under review (January to September 2009), the properties posted a RM15.8 million net operating income (NOI), backed by a total revenue of RM21.5 million compared to RM15.1 million NOI and RM20.4 million revenue recorded in the previous year corresponding period. Assuming the properties sustain its present performance, the properties will be on track to achieve the MARC’s expected full year NOI of RM20.53 million, which will support maintenance of MARC’s DCF valuation of the properties at the present level. The market value of the properties at RM304.4 million is 32.8% higher than our DCF value. As at September 30, 2009, the interim debt service cover ratio (DSCR) for the facilities stood at 6.4x, well above the minimum covenanted DSCR of 1.75x. Stress tests to assess, among others, the impact of reduction in rental rates and non-renewal of leases indicate that the properties should maintain adequate DSCR coverages over the tenure of the transaction. Meanwhile, the security cover for the lowest-rated notes at present is comfortable at 2.6 times (x).

The stable outlook reflects expectations that the properties will continue to generate timely and stable cash flows in the future, underpinned by stable occupancy levels and creditworthy tenants with good payment record.

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