Gandalf Capital Sdn Bhd - 2010

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 million Commercial Papers/Medium Term Notes Programme comprising RM87 million Class A, RM16 million Class B  and RM15 million  Class C notes respectively with a stable outlook. Wholly-owned by Quill Capita Trust (Quill Trust), Gandalf Capital is a special purpose vehicle incorporated to facilitate the issuance of the notes to fund acquisitions of commercial properties by the Quill Trust. The transaction relies on rental collections from four purpose-built office properties in Cyberjaya to fund coupon payments during the tenure of the rated programme and sale of the properties for principal redemption if refinancing of the notes does not occur by the expected maturity date. The affirmed rating considers the full occupancy of the securitised properties, prompt rental payments from lessees of good credit standing and the low loan-to-value (LTV) ratios of all three non-amortising classes of notes. The ratings are moderated by the high single tenant concentration risk, which may pose lease renewal risk during difficult economic conditions. The stable outlook reflects the expected stability of cash flows generated by the properties given the low proportion of leases expiring during the remaining tenure of the transaction.

Quill Trust, a real estate investment trust (REIT) listed on Bursa Malaysia, is managed by Quill Capita Management Sdn Bhd (QCM). CapitaLand RECM Pte Ltd (CRPL), a 40% shareholder of QCM, is a wholly-owned subsidiary of CapitaLand Financial Limited (CFL), the real-estate fund management and financial advisory arm of CapitaLand Limited. CapitaLand group’s track record of fundraising has been factored into MARC’s assessment of Gandalf Capital’s financial flexibility. 

The freehold properties are office buildings with total net lettable area of 493,118 square feet, located within Cyberjaya’s Flagship Zone. As of August 2010, 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  August 2010, over 65% of the leases will expire in the second half of 2012, substantially mitigating non-renewal risk during the tenure of the transaction up to the expected legal maturity year of 2011. The non-renewal risk of the collateral portfolio is also deemed low given the nature and the strategic importance of the tenants’ operations in Cyberjaya with respect to their respective holding companies. MARC notes the absence of downward pressure on rental rates since our last credit review in January 2010 evidenced by renewal of lease by a major tenant at a higher rental rate.

Given the non-amortising structure of the notes, the LTV ratios for Class A, Class B and Class C notes remained unchanged at 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 six-month financial period ended June 2010, Gandalf Capital reported a net operating income (NOI) of RM10.7 million on the back of RM14.5 million of revenue. Comparatively, this interim NOI generated is in line with MARC’s 6-month sustainable NOI of RM10.25 million, and is on track to achieve the full year NOI of RM20.5 million which will support maintenance of MARC’s DCF valuation of the properties at the present level. The market value of the properties at RM305.35 million is 33.9% higher than our DCF value, translating into security cover of 2.6x for the lowest-rated note. Meanwhile, debt service coverage has been consistently above the covenanted level and is expected to be sustainable.

In the event the notes are not refinanced by their expected maturity, the notes trustee will proceed to dispose of the properties by exercising the Power of Attorney (PoA) granted by Quill Trust. However, it is expected that the disposal of underlying properties will be a more time-consuming process for Gandalf Capital as Quill Trust remains the legal owner of the properties and the PoA guidelines which essentially makes it incumbent on the attorney to obtain the best reasonable price. Mitigating the delay in realisation of collateral value is the two-year tail period to legal final maturity date at the seventh year which provides a reasonable time frame for the sale to be concluded within the facilities’ tenure. The transaction structure prohibits dividend upstreaming to Quill Trust’s REIT unitholders in the event of default or breaches of financial covenants under the programme. The notes are secured by a third party first legal charge on the collateral properties.

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