Special Coral Sdn Bhd - 2015

MARC has affirmed the long-term ratings on Special Coral Sdn Bhd’s (Special Coral) RM300.0 million Senior Class and RM800.0 million Subordinated Class Medium-Term Notes (MTN) under the RM1.1 billion MTN Programme. The outlook on the ratings is stable. The list of ratings is shown in the table below.

Special Coral had used the proceeds from the MTN issuance mainly to acquire 90.5%, or about 913,834 sq ft of gross retail area, of the eight-storey Queensbay Mall in Bayan Lepas, Penang in April 2011. Rental income from the leasing of the mall’s retail space will continue to meet the semi-annual interest payment obligations on the outstanding MTNs. As of December 31, 2014, Queensbay Mall’s net lettable area stood at 872,764 sq ft, with an occupancy rate and average rental rate of 98.5% and RM7.17 per sq ft (December 31, 2013: 94.4%; RM7.06 per sq ft). The affirmed ratings are underpinned by Special Coral’s conservative loan-to-value (LTV) ratios and debt service coverage ratios (DSCR), which are backed by the stable operating performance of the retail mall.

Revenue and cash flow from operations (CFO) increased by 7.1% and 17.7% to RM87.7 million (2013: RM81.9 million) and RM64.1 million (2013: RM54.5 million) respectively on the back of higher rental revenue and tenants’ improved sales performance. MARC has maintained the valuation of Queensbay Mall at RM460.0 million after taking into consideration the challenges in the retail industry as well as slower growth in consumer spending. This represents a 44.9% discount against the retail mall’s market value of RM835.0 million as appraised by an independent valuer as at December 31, 2014. The LTV ratios of the
Class A through Class F Notes remain between 34.8% and 65.2%, which are commensurate with the rating bands. The DSCR for the Senior Class A and Class B Notes remained strong at 7.09 times and 5.57 times  respectively in 2014. The rating on the Subordinated Notes continues to reflect its lower priority in payment and higher risk of non-payment under stressed conditions relative to the Senior Notes. MARC observes that CFO interest coverage has benefited from the partial deferment of coupon payments on the Subordinated Notes since 2011. CFO interest coverage stood at 1.20 times as at end-2014. However, mainly as a result of the accumulation of deferred coupon payments, Special Coral’s non-trade payables have grown rapidly to RM147.9 million as at end-2014.

MARC notes that Special Coral issued an additional RM5.0 million Subordinated Notes in 2014 to part finance the capital expenditure for Queensbay Mall. The ongoing asset enhancement works at the retail mall have resulted in a high proportion of one-year lease tenancy agreements rather than the typical two- or three-year tenancy agreements. Given that 27% of the occupied area of the retail mall, which accounts for 39% of gross rental revenue, will expire by end-2015, Special Coral is exposed to lease renewal risk. This is mitigated by the low tenant concentration, with each tenant contributing not more than 2.0% of gross rental revenue with the exception of anchor tenant AEON Co. (M) Berhad.

Senior Class A and Class B Notes have been rolled over with a new legal maturity date of October 1, 2018. Given that the Senior MTNs are non-amortising, noteholders are exposed to refinancing risk. This is mitigated by two features incorporated in the programme transaction structure. First, two call options are exercisable by CapitaMalls Asia Limited (CMA) to purchase either the outstanding Senior MTNs (Senior MTNs Call Option) or the retail mall (Property Call Option). Second, the security trustee has the power of attorney to dispose the retail mall within an 18-month tail period between the expected and legal maturities.

CMA’s undertaking to cover any shortfalls in the semi-annual coupon payments on the Senior MTNs further supports the ratings. CMA’s status as a wholly-owned subsidiary and a strategic business unit of Singapore-based CapitaLand Limited also underpins high parental support under MARC’s assessment. For the financial year ended December 31, 2014, CMA’s  financial performance has weakened with lower cash and cash equivalents of S$657.0 million (December 31, 2013: S$1,062.8 million) and a reduced current ratio of 0.90 times (December 31, 2013: 2.42 times), although CMA’s debt-to-equity ratio declined to 0.36 times (December 31, 2013: 0.38 times).

The stable rating outlook is premised on MARC’s expectations that the operational and financial performance of Queensbay Mall would remain supportive of ratings.

Major Rating Factors

Strengths

• Strategic location and steady visitor traffic;
• Healthy occupancy levels and low tenant concentration risk;
• Conservative LTV limits for the Senior Class Notes;
• Good track record of property manager; and
• Irrevocable and unconditional call options held by creditworthy entity.
  

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.