The outlook on the ratings is stable. Since transaction close, only RM660 million have been issued under the MTN Programme comprising RM160.0 million, RM40.0 million and RM460.0 million of Class A, Class B and Subordinated Notes respectively.

While Special Coral was established as a bankruptcy remote special purpose vehicle (SPV) to finance the acquisition of the eight-storey Queensbay Mall located in Bayan Lepas, Penang, the SPV may also issue subsequent classes of notes to finance future capital expenditure and working capital. The outstanding notes are serviced by rental streams from the leasing of the shopping mall’s 886,532 sq ft net lettable area. However, as the Senior Notes are non-amortising with expected maturities in 2014, noteholders may face refinancing risks which are mitigated by the 18-month tail period between the expected and legal maturity of the notes. The risk is further mitigated by the trustee’s power of attorney to dispose of the shopping mall in the event CapitaMalls Asia Limited (CMA), the parent company of the transaction’s servicer CapitaLand Retail Malaysia Sdn Bhd, does not exercise its call options to purchase the mall, purchase the outstanding senior notes, or put in place the necessary refinancing within this period.

The ratings on the Senior Notes are underpinned by the profile and performance of Queensbay Mall as indicated by its satisfactory loan-to-value (LTV) and projected debt service coverage ratios (DSCR). The ratings are also supported by CMA’s undertaking to cover any shortfalls in the funding of semi-annual coupon payments on the notes and its track record and expertise in managing shopping malls across Asia. CMA’s credit profile has weakened somewhat since MARC’s last rating review in May 2012, evidenced by the continuing trend of negative free cash flow and debt accumulation stemming from the expansion of its property portfolio. In this respect, MARC draws comfort from CMA’s diversified funding sources, well spread out debt maturity profile and meaningful financial flexibility as a majority-owned (65.4%) subsidiary of Singapore’s leading real estate developer, CapitaLand Limited. Meanwhile, the rating of the Subordinated Notes continues to reflect its subordinated priority in payment and higher risk of non-payment under stressed conditions relative to the Senior Notes.

The stable ratings outlook is premised on MARC’s expectations that the future performance of Queensbay Mall would remain supportive of the affirmed ratings. Downward rating pressure could emerge if the mall’s net operating income (NOI) declines below MARC’s assumed stabilised NOI of RM36.0 million due to lower-than-expected occupancy levels in combination with flat rental rates.

The mall’s average rental rate remains stable at RM5.98/sq ft compared to RM5.88/sq ft a year ago. Although the occupancy rate of Queensbay Mall declined to 91.2% as at December 31, 2012, from 94.9% a year ago, it is sufficient to support the mall’s NOI at a level above MARC’s assumed stabilised NOI. The decline in occupancy rate has been mainly due to the expiry of 76.3% of the leases in 2012, the majority of which have been renewed. However, MARC notes the transaction faces some lease renewal risk as most leases are one-year contracts, with 51.4% of the leases are due to be renewed in 2013. This could expose the transaction to reduced rental cash flows either due to tenants vacating the mall or negotiating lower renewal rents. Nevertheless, the mall continues to attract significant shopper traffic of 13.6 million in 2012 which is expected to support lease renewal, while the tenant profile is also well-diversified with individual tenants, other than anchor tenant AEON Co. (M) Bhd, contributing less than 2.30% of total gross rental revenue each.

Special Coral reported a NOI in 2012 of RM46.9 million compared to RM28.5 million for the nine-month period ended December 31, 2011. Its NOI is comfortably above MARC’s assumed stabilised NOI of RM36.0 million, which generates a valuation of RM400.0 million for Queensbay Mall with a capitalisation rate of 9.0%. Based on MARC’s valuation, the respective LTV ratios of the Class A through Class F notes remain well within the rating agency’s benchmarks at 40.1%, 50.1%, 58.9%, 65.2%, 67.7% and 75.2%. The DSCR for the outstanding Class A and B notes also remain strong at 6.99 times and 5.46 times respectively.

Major Rating Factors

Strengths

Risks

• Short lease tenures which could potentially expose the mall to some income volatility;
• Increasing supply of competing retail space; and
• Refinancing risk posed by bullet repayment structure of the debt programme.